Impact investing expert Young-jin Choi talks about opportunities and difficulties
In the past you’ve heard us talk quite a bit about why you should invest, sustainable investing and investing tips.🌱 To spice things up, today we would like to present you another opinion:
In our Cooler Future podcast, Young-jin Choi, an impact investing expert at PHINEO, a nonprofit analysis and consulting company, discussed what impact investing is and shared his views on how integrating impact into investment decision making can help protect future generations.
If you're more of a reader than a listener, we've got just the thing for you: Read on to get a quick summary of the topics covered in the podcast episode. 😎
Disclaimer: The following content reflects the views expressed by the interviewee during the discussion.
1. Integrating impact into investment decisions - compared to the classical approach of only focusing on risk and return - would force investors to make a judgement whether the investment has a negative or positive impact on our planet and society.
2. Negative externalities such as high emissions need to be quantified and made part of decision making processes to ensure the right incentives are in place to encourage reduction of emissions.
3. A redefinition of our understanding regarding corporate responsibilitiescould help in taking into account long term environmental and social consequences as part of corporate mandates.
4. Furthermore, the public sector - meaning governments & state controlled entities - should lead and be determined in their role to support low carbon emissions.
In the podcast, Young-jin Choi describes impact investing as being characterised by intentionality. This means that investors actively choose to consider the impact of their investments, measure and manage the associated effects, and adjust their spectrum of financial expectations i.e. from being willing to compromise returns to expecting full market rate return.
This said, investing ethically shouldn’t necessarily mean losing money. 💸
Compromising returns still represents a challenge for investors who want to be very strict and stringent about what they invest in, in terms of ethical requirements. For example public and listed equity companies can be relatively constrained on how much profit or shareholder value creation they can sacrifice.
Companies may also lack the right incentives to reduce emissions if it cannot be done in a cost efficient manner. The challenge with the current economic system is that it is built for maximizing profit.
Most investment decisions are based on risk and return considerations without accounting for the long term environmental and social consequences.
Business activities associated with clear negative impacts such as high greenhouse gas emissions are highly profitable at the same time. This shows that the market which is supposed to price goods and services properly has failed for the past because all the future cost and damages of carbon emissions (also called “negative externalities”) have for example not been included in the prices of fossil fuels.
It is clear that the market has not been able to sufficiently integrate external costs into prices. For example carbon pricing today only applies to a relatively small share of economic activities. Carbon pricing could be used more widely to protect low carbon intensive activities and sanction activities with high carbon footprint.
According to Young-jin Choi, policies and laws should also be addressed when we’re talking about impact investment.
Currently there is a lack of clear mandate for corporations in terms of sustainability and impact. For example, it has not been clearly defined in the corporate law that companies should not seek economic profit at expense of the environment, society and future generations. Appropriate corporate governance laws are needed to protect future generations.
Governments and the public sector should take a more active role in driving the change via public spending, especially when it comes to public infrastructure and the shift to clean energy.
Even though development of technologies is accelerating, public spending is needed to de-risk projects. Any subsidies should be targeted to support low carbon transition, not high carbon intensity activities.
“Increasing and applying carbon prices are something that we need to fight for as climate activists.”
If environmental and social impact considerations were made part of all investment decisions, public or corporate mandates would not even need to be changed because investments would already be flowing to the best assets, considering both financial and impact characteristics.
Okay, enough information about our general economy, we'll end this article by giving you some ideas about what YOU can do as an individual!
As an individual investor you can participate in annual general meetings of companies, write letters, or become an activist. It is important to engage not only with specific companies but also on a higher level on regulatory changes and climate policies.
“We all have to play our parts as investors, entrepreneurs, and employees. We all have to become more engaged as citizens in terms of climate policy.”
P.S. : If you would like to see an example of the impact investor activism can have, you can read our article about Shell’s annual meeting on our blog 🤓