A report published by the Fondaction-backed Canadian Impact Investing Working Group is urging institutional fund managers to pursue environmentally and socially conscious investment strategies.

Scaling Impact Investing in Canada Through Mobilizing Asset Owners attempts to raise awareness in the investment community of the potential inherent in impact investing.

It further seeks to establish a framework wherein pension funds and similar large institutional investors are able to harmonize orthodox goals of achieving competitive rates of return on capital while building an increasingly sustainable asset portfolio.

Not only are fund managers being encouraged to invest in companies committed to decarbonization and engaging in a multitude of other green practices, they're also being asked to weigh the benefits of an impact investing strategy that may be just as effective in generating desired rates of return over the long term as a less environmentally conscious approach.

Undertaken by Quinn+Partners on behalf of the Working Group, the report sets out the challenges and barriers to impact investing in Canada and lays down a roadmap of 18 recommendations for investors, asset managers and beneficiaries at various stages of their "impact journey."

Five pillars of impact investing

The report states investors need to play a greater role in driving the transition to a sustainable economy in the face of global challenges such as climate change and inequality. 

"Impact investing – investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return – continues to grow as a potential solution used in tandem with other responsible investing approaches," the report reads.

Five pillars are identified as critical to accelerating the mobilization of capital in favour of impact investing. The principles help broaden the perspective of institutional funds by providing a rationale for asset allocation to positively impact on transitioning Canada toward a greener and more equitable low-carbon economy. 

The study concludes an optimal impact investment strategy can be deployed according to short- and long-term investment horizons and will ultimately encompass "all stakeholders linked to the investment chain."

The five pillars are:

• Mainstream: Clarify principles to broaden support, commitment and mobilization among investors and beyond.
• Develop products: Increase and diversify opportunities for impact investing in Canada.
• Experiment: Explore impact investing in concrete terms and encourage decision-makers and investors to learn, train and act.
• Accelerate Capacity Building: Accelerate the pooling of knowledge, expertise and cooperation.
• Advocate: Encourage the implementation of policies favouring impact investing.

Socially responsible and sustainable investing

By supporting the efforts of the Working Group, Montreal-based Fondaction is promoting the basic principle that impact investing is consistent with fiduciary duty. Fondaction aims to create a general consensus and community of shared interests with respect to impact investing.

This involves identifying investments that benefit sustainability, taking financial stakes in companies committed to decarbonization, and clearly articulating the desired impact and commitment required to achieve such a result.

"One of the primary components of impact investment is aligning on intention," Stéphan Morency, executive vice-president, strategic initiatives at Fondaction, told Sustainable Biz Canada. "We need to understand that we're working with the same intentions. And one of our goals is to have people recognize themselves in between the asset owners as working towards the same objective."

"Impact investment (differs) from the subset of sustainable investment in that it tries to add rigour by establishing 'What's your intention?' . . . You need to align where you can actually act with intention with the fact that you'll have to (achieve) a mark to market return."

Impact investments are geared toward generating return on capital that can range from below market to market rate, depending on the circumstances. "The goal is to balance financial performance with social and environmental impact," according to the report.

A force multiplier for sustainable development

Having previously served for five years as VP and chief investment officer at Fondaction, in April Morency was appointed to his current role.

He is now is spearheading the drive toward embedding impact investing in the hearts and minds of institutional investors as part of a mission to scale up equitable and sustainable investment solutions. 

"We often say at Fondaction that what we want to do is finance change," Morency said. "(Within the context of impact investing), the way we see it is that sustainable investment involves investing in companies that bring solutions and creates an equilibrium between fulfilling people's needs and the limits of the planet.

"This represents such a challenge that a large amount of the capital, even the majority of capital, should be invested (according to that imperative). And I have to say that it's not just a question of necessity, it's also sound investment strategy because all these changes in the economy are becoming necessary.

"The important thing about the report is that our group of asset owners representing $1.5 trillion under management came to a common definition of what it is we do, what it is we pursue as an opportunity, and what it is that represents an obstacle." 

Connecting the investment ecosystem

In compiling the report, one of the most significant findings relates to what Morency describes as the "engagement of the beneficiaries" representing the end point of the impact investment process.

In Morency's view, impact investment will gain increasing momentum and traction when stakeholders play a more active role in how funds are being managed according to a new set of social and environmental guidelines and objectives. 

"It's important to reduce the distance between the various points along the investment chain . . . and engage the beneficiaries so they can actually ask more from their pension funds or asset owners and enlarge their fiduciary duty towards them.

"And as an asset owner working group, we'll try and tackle what only we can do because we have the means to do it and give it back to the ecosystem. We want to find the best way to make a significant contribution as asset owners."