Launched a decade ago by financial institutions, the “responsible” finance movement is creating new buzz among startups.
Leading up to the Novae Forum, slated for this fall in Montreal, we will be talking with experts across the food, energy, finance and architecture industries to get a clearer picture of certain trends. For the first article in this series, we spoke with Milla Craig, co-founder of Finance and Sustainability Initiative (FSI), about the evolution of responsible investment.
Before getting started, let’s review the difference between responsible investing and impact investing. In 2006, the United Nations launched its Principles for Responsible Investment (PRI), a voluntary set of principles for the finance sector that encourage investors to incorporate environmental, social and governance (ESG) factors into their investment practices, but in a broader sense. The principles focused primarily on corporate social responsibility rather than actual social impact. Impact investing, as defined by the McConnell Foundation, is when investments are made in businesses, organizations and funds to generate social and environmental impact, in addition to a financial return. Impact investing can take place in emerging or developed markets and target various types of returns at or below market value, depending on the situation.
ESG criteria key to responsible investing
“Responsible finance primarily results from responsible investing. This isn’t a revolution—it’s an evolution in the way we analyze, select and manage investments by incorporating environmental, social and governance criteria. So we talk about ESG criteria in the hopes of producing better returns in the long run, improving longevity for businesses and financial markets, and promoting a more stable, inclusive global economy.” According to Milla Craig, investors do not have to choose between financial performance and sustainable development. In a report released by Morgan Stanley, it was shown that investors and businesses that incorporate sustainable development into their practices have the most success. That is why for more than ten years, most banking institutions have been developing responsible investing programs.
Startup banks and responsible finance becoming more widely accessible
“I am particularly interested in projects that adopt or are shifting toward a sustainable business model,” explains Craig. Through this model, businesses take the long view and manage their financial, environmental and social impact and results. “Organizations that adopt this model make better business decisions and can have a positive impact on the environment, and on society. These companies often generate higher profits and returns for shareholders.” Craig says that investors are also more trusting of organizations that are resilient, innovative and aligned with their values.
“I have been closely following the start of Impak Finance. The founders of this new type of bank clearly have a strong drive to innovate.” The fledgling company hopes to create a transparent and collaborative financial ecosystem in which people can invest in initiatives that reflect their societal values. To kick off its activities, Impak Finance held a crowdfunding campaign in late 2016 that raised over a million dollars. “They came with a unique approach to talking to the average person. They want to show that we can make a difference, at any level, and that is what people want.”
This is not dissimilar to the approach of CoPower, a B Corp-certified company founded in 2013, targeting people who want to invest in clean energy projects. CoPower’s green bonds are tied to projects like solar rooftop installation. In March, the company announced plans to issue $20 million in new green bonds by the year’s end.
“Even if a company like Impak Finance clearly meets a consumer need, it is still too soon to say what its future holds. We are still in the early stages of impact investing in Canada. But one thing is sure—the emergence of projects such as Impak Finance and CoPower will influence the way that traditional banking institutions think about investing.”