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Once considered a niche area of sustainable investing done almost exclusively through private markets, public-market impact investing is expanding rapidly. Impact Measurement and Management Practice Leader Oyin Oduya sits down with host Thomas Mucha to discuss the future of impact investing, her research approach, and how her team thinks about generating market-rate returns alongside positive social and environmental outcomes.
THOMAS MUCHA: Today’s topic is impact investing. How to use the power of financial markets and capitalism more broadly to drive positive change by investing in companies that are creating beneficial environmental and social outcomes. It’s one of the more uplifting subjects you’ll hear on this podcast, and we’re thrilled to have Wellington’s Impact Measurement and Management Practice Leader, Oyin Oduya here to help us understand impact investing. How and why we do it and what role it plays across global financial markets. Oyin joins us today from London, where she’s based. Welcome to WellSaid.
OYIN ODUYA: Thank you, great to be here.
THOMAS MUCHA: Let’s start at the very top. What’s your definition of impact investing? I mean, what are we talking about here?
OYIN ODUYA: Well, it’s a great question to start with because there can be multiple definitions. So, in my view the most broad definition of impact investing is investing for market-rate returns alongside measurable and positive environmental or social outcomes. And so for a company to fit inside an impact investing portfolio, you have to have done quite a lot of rigorous analysis to understand how the company’s products and services act to address certain social or environmental goals. And this can be things like helping to improve access to quality health care or education, helping to green the grid and boost alternative energy provision, or helping to increase financial inclusion in emerging markets. If your products and services align with achieving pre-defined impact goals, then your company can be a good fit in terms of an impact investing portfolio.
THOMAS MUCHA: So it’s the best of both worlds. It’s trying to, get a return on capital but create positive outcomes.
ODIN ODUYA: It’s trying to have your cake and eat it, exactly. I think that impact investing is the most powerful where the achievement of those social or environmental goals is really wrapped up in what the company does. And I think you can really, I guess, harness, the power of capitalism, the power of markets, the power of the profit motive to try and drive these positive changes in the world. And so, when you have impact really inherent in what the company does, you don’t need to think about any sort of tradeoffs between impact and return. They should be, if you’ve done your research right, one and the same thing.
THOMAS MUCHA: Right so, broadly speaking from a firm perspective, why do we do this?
OYIN ODUYA: I’d say thinking about the growth of impact investing over the last few years, I think there’s been a realization that it’s not just governments and philanthropists and charities that can help solve world’s biggest problems, right? The private sector has to play a part. If you think about the U.N.’s sustainable development goals, 193 countries have decided are the most pressing ones that we need to solve. But, the U.N. has said that there’s a 2.5 trillion US-dollar funding gap to achieve the SDGs. And so, governments can’t do that alone. The private sector has to be involved. So I think that’s kind of one of the reasons why we do impact investing. But the other reason is to make a financial return, right? A lot of the things which drive impact investing are big, sweeping structural changes that we see in society whether it be trying to solve or at least lessen the climate crisis, trying to reduce global inequality. If you have a product or service that makes profit and addresses problems at the same time, again, it’s the best of both worlds. I think that’s why we do it; to try and encourage the private sector to play their role in making positive changes that we need to see across society.
THOMAS MUCHA: Right, so in what ways does impact investing differ from ESG?
OYIN ODUYA: Yeah, it’s a spectrum when it comes to sustainable investing. And I’d say on the one hand you have ESG which is really about how a company does business. ESG can be applied to any company. It’s about the environmental, social, and governance risks and opportunities. No matter what you do, you can always be better at treating your employees well, making sure you have, an independent board of directors, making sure that you’re managing your energy uses efficiently as possible. Whether you’re a clothing retailer or a utility or a tech company, ESG issues are gonna apply to your business. Impact is a little bit more specific. It’s not about how you do business it’s about what you do. So not all companies can be impact companies, but you can apply ESG to everything. And so that’s kind of how I distinguish them in my head. To kind of simplify it and short-list, it’s about sales. If you’re an impact company, more sales equals more impact. ESG is not really related to how much you sell, it’s about what you’re doing to achieve those sales.
THOMAS MUCHA: Great, so it’s one step beyond.
OYIN ODUYA: Exactly.
THOMAS MUCHA: Tell us a little bit more about your career arc and how you ended up in this key position at Wellington. What was your path?
OYIN ODUYA: You know, it’s really funny because when I talk about my career path it feels like it makes a lot of sense like of course you’re gonna end up here, but actually at the time it did not feel like it made sense at all. So I studied economics at the University of Cambridge. I was always really interested in economic development. I thought I was gonna end up either working at the UNDP or World Bank. I started my career at Bank of America Merrill Lynch in London in equity sales. But after a few years of that I really felt like I wanted to do something related to emerging markets and I just remember one of my clients saying to me, “Oh, the top line for all of these European consumers staple names is rubbish,” because it was the middle of the kind of European crisis everyone thought Greece was gonna go bust. He said the only ones that are good are the ones that have subsidiaries in Sub-Saharan Africa, like Nestle in Nigeria, Unilever in Nigeria, etcetera. You know, what’s happening there?
And he said, “Oyin, you’re Nigerian, you should know.”And I thought, “Actually, I don’t know and as a firm we don’t know and I think we probably should know.” And so that’s kind of why I started thinking about how can I get involved in African financial markets. It was a very busy two years working with the Sub-Saharan African economists where there was a lot of issuance coming out of the region at the time. But it was fascinating; we would do these kind of crazy trips across the continent, like eight countries in two weeks to Cameroon, Ethiopia, Nigeria, and I felt like it was personally quite a privilege to be able to learn about my own country, Nigeria, as part of my role. It was great.
So I really enjoyed that, but I felt like I was still a little bit far away from where impact was happening. And so that’s when I started to think about impact investing and you know really it was building up particularly in private markets, particularly in emerging markets. I joined Leapfrog Investments. And then I joined the impact team really kind of doing IMM before it was called IMM, trying to assess kind of where there’d been good trends in terms of both impact and financial returns in the portfolio. So yeah, each step kind of got me closer towards what I wanted to do and coming to Wellington is just such a unique opportunity, I think, to be able to bring a little bit of my experience across public and private markets, across equity and fixed income, to a platform that takes sustainable investing and impact investing so seriously and has been doing it so well for such a long period of time. We’re still continuously learning how to do this well and I think it’s because of how people collaborate so well at Wellington it’s gonna be a great place for me personally to kind of grow and learn and hopefully have a positive impact across the firm and maybe even across the industry.
THOMAS MUCHA: So, who do you think, or in your experience who is seeking these investment options? Does it tend be younger investors, millennials? Does it have to do with wealth transfer? Is it other segments of investors? I mean, who’s driving the market right now, I guess is the question.
OYIN ODUYA: Yeah, absolutely. I’d say in terms of who is in the market right now it’s a relatively broad church of institutions and individuals. So you have pension funds, insurance companies, asset managers, family offices, some foundations and development finance institutions. So, there’s a relatively broad set of actors in the industry. But I do think you’re right, it’s the younger generations, it’s Millennials who are driving us towards thinking about impact when we invest. And we just have to think about Millennials that sector will inherit, I think, 70 trillion dollars’ worth of wealth by 2030, and they just have fundamentally different ideas from their parents and grandparents as to how do they want to invest their money, what they think their money can and should do, and even how they want to spend the money they don’t invest in terms of what brands they support. And so I think that the younger generation have a much higher bar when it comes to investing their money and they think about the impact of their investment. Yes, they want to make financial returns and that has to be a key goal, but they also don’t want to sacrifice, kind of sustainability. And even more, they want to try and push positive outcomes through how they invest. And that conversation I think is constantly, constantly happening and it’s part of what’s driving the market forward.
THOMAS MUCHA: It’s interesting, in my research as geopolitical strategist, I spend a lot of time with policymakers, people in government, and with younger people as well around the firm, and I do notice a different view that younger investors tend to have towards government in general. Why aren’t governments sufficient to address the needs of society? Or put another way I guess, what can financial markets offer that political leaders or broader political contexts can’t offer?
OYIN ODUYA: That’s a good question. I think that you’re right that governments aren’t sufficient. We have the numbers as I mentioned from the U.N. saying we have this big funding gap. Especially given all this spending that’s happened post-COVID, like, it’s just a question of the financial resources maybe aren’t there to do the amount of spending that we need to reach, kind of net zero by 2050 or to improve the kind of situation we have in turns of global inequality or access to basic services. So I think part of it is a financial issue. But also I think there’s an issue in terms of innovation. The private sector tends to be able to move faster. They can move more independently. Sometimes the private sector has to push forward and lead but that’s not to be said that the government doesn’t have a role to play. I don’t think the private sector alone is sufficient to achieve the change that we need and to achieve the SDGs. They need that to work in tandem with the government to get to where we need to go and one, I think, really interesting example of this is the first SDG to alleviate poverty. A lot of impact investors are focused on investing in emerging markets and financial inclusion is a huge theme and an impact theme for us at Wellington as well. And you have a lot of studies that show that one of the biggest determinants of poverty is your access to income-generation opportunities, your ability to have access to insurance, so that if you kind of fall on bad times you have a safety net so you don’t fall back into poverty. So you can really see how the private sector by banking the unbanked, going into maybe areas where they haven’t had access to financial services and giving access to those products, that could be a huge benefit in terms of helping to alleviate poverty. But poverty is so multi-faceted. Financial inclusion alone is just a small part of that. Poverty incorporates trying to avoid hunger, malnutrition. It’s about land rights and title rights. It’s about fair access to resources. It’s about gender equality. There’s so many different aspects to poverty. There’s no way that the financial sector, private sector, can solve that alone.
THOMAS MUCHA: Yeah, clearly there are plenty of problems around the world. There’s plenty of opportunities to try to alleviate some of these issues. But I’m very curious in your views on how this shifting geopolitical backdrop, these increasing tensions, the amount of time that governments are now forced to spend on national security and other issues related to this. How does this impact your thinking about the market opportunity for impact investing?
OYIN ODUYA: I think there’s actually some interesting, I guess, crossover topics between geopolitical concerns and impact investing, and I think one area where this really comes to the fore is climate adaptation. So of course, we know there’s a climate crisis and there’s so many people focused on trying to mitigate, to try and reduce the amount of GHG emissions that we put out to try and slow global warming. But across the world, national governments have to think about the safety and security of their people and their assets. And that can also include strategic assets. I think adaptation and thinking about how we adapt to more extreme weather and to the effects of global warming is one of the areas where kind of impact and climate and national security really intersect.
THOMAS MUCHA: Yeah, it’s certainly a big interest of my research agenda as well. I’m curious Oyin, there there’s a lot of opportunity out there, a lot of government, a lot of public companies. There’s also the private market and you know I’m interested in your views on the key differences between public and private market impact investing.
OYIN ODUYA: It’s a great question, especially since I’ve spent most of my career working private market impact investing. And I can actually start with some of the similarities which is the overall goal of impact investing whether it’s in public or private markets is essentially to lower the cost of capital for companies who are solving these kind of key social and environmental problems. And that is the standard whether you’re in the public or private markets. You’ll want these companies to scale and grow faster so they can do more good more quickly. I think the main difference between them is probably the effect that you can have on the company as an investor. And of course, this is a generalization. It depends on kind of the type of private equity investing they’re doing or private credit. But in general, if you’re a very active investor on the private side you could have an observer seat on the board, you could be on the board, you can be a lot more vocal in terms of talking to management, trying to direct strategy or think about new products or new markets, which of course helps make the company money first and foremost, but it can also help drive impact. And so, in that sense private market impact investing has more direct investor additionality. But on the public side, there’s still a lot that you can do as an investor. So you may not have a seat on the board, you may not have kind of the ear of the CEO in the same way that you would have in a private company, but you can still engage on the issues that you think are important. So for example, helping companies to come up with a credible, transparent narrative on how their product and services can lead to better social, environmental outcomes can be, I think, a real value-add for them because it allows them to tell their impact story more clearly. So I think engagement there can also be very important. But what I would say is that, in general, in public markets the additionality — and let me kind of break down the jargon. In impact we think about additionality as what is happening through your investment or through the products and services this company is producing that drives impact outcomes that are different from what have otherwise happened. What is the counterfactual, what is it you’re doing that’s different from business as usual? In private markets the additionality is really about you as an investor. In public markets, the additionality is much more about how is the company itself driving changes? Enterprise-level additionality rather than investor-level. So those I think are the main differences but I would reiterate that the overall goal is the same.
THOMAS MUCHA: Yeah, that’s an interesting distinction there. Now, obviously measurement of this is important. I have a couple of questions about how we think about how to put some numbers to these issues. So, I guess, first, what qualifies a company as impact? What are the steps that we go through?
OYIN ODUYA: Yeah, again this depends on you know the asset manager on the fund but I would say more broadly, particularly looking at our public-market impact and investing strategies we have three criteria: materiality, additionality, and measurability. The materiality means that at least 50 percent of the company’s revenues have to be aligned with one of our impact goals. That can mean the additionality, which is what I mentioned before, and this is the enterprise level, what is the company doing that’s different from its peers to drive impactful outcomes? And normally this is related to either cost or innovation or sales. I’m providing, I don’t know, educational services online instead of in person. That’s at a much lower cost, so it increases the amount of access. Or I’m making components for solar panels which use a lot less water-intensive processes than the next best alternative, and therefore I’m contributing to growth of alternative energy and also resource efficiency. So trying to understand what is different from this company versus others. And then lastly, measurability. And that’s where my team comes in. We have to have a KPI-defined outcome that we can track over the life of the investment that will speak to the ultimate impact we think the company has. And that’s super important because without the KPIs we’re kind of just telling stories want to be able to as much as possible have data behind the impact we think our companies have.
THOMAS MUCHA: So what does that mean?
OYIN ODUYA: That means a lot of work on my side! It’s a big challenge. It takes a lot of work. I always think that I say to people impact investing is standard investing but with a whole other layer of work and diligence and monitoring on top of it because at the end of the day you have to make the financial return, you have to have the impact return as well. And so it means, really, that we go through every single issuer, go through their reporting, go through what they’ve disclosed, and try to understand — okay, what are they reporting that we can link to the ultimate social and environmental impact? And sometimes it takes work on our side to do transformations of data or to do extra research like during the academic literature or during some kind of third-party research that kind of shows the impact that we want to have can be actually be met through this company.
THOMAS MUCHA: What are some of the challenges here on the measurement side?
OYIN ODUYA: I think the impact measurement part of it is challenging for quite a few reasons. I think the first is the impact metrics, as they stand right now in the industry, tend to be quite bespoke and bottom up. And, of course, at Wellington we’re kind of a bottom-up fundamentally research-driven firm, so it kind of plays to our strengths. But at the same time it means that you have to spend a lot of time for every individual issuer in your impact fund, thinking what is the KPI, how am I calculating it, how can I be transparent as to how I got that number if I. (inaudible) It can be quite involved. And then it creates an issue in the kind of broader industry point of view because if you are, say, an asset owner investing in multiple different impact funds, they may all be coming out with different impact metrics. So how do you compare impact in one firm to impact in another if they’re all measuring different things? You know, if you’re looking at a standard fund manager, you can say this is how many years they’ve beaten the benchmark, this is their IRR. In impact, there’s no such kind of benchmark to be able to say this is how good a fund manager is at creating impact. So that measurement piece of it as much as it’s good to be as detailed as possible, that detail can often create problems when you’re trying to aggregate data even within funds, let alone across funds. So that is a challenge that we have to kind of face. But I think that the industry is moving towards a better place, and we do have some frameworks and standards which are coming up and being commonly accepted. So one of those is the IRIS+ system of metrics that is backed by the Global Impact Investing Network. It’s essentially just like a long list of metrics that says if you’re looking at alternative energy why don’t you measure GHG emissions avoided or reduced? If you’re looking at affordable housing, why don’t you measure builds or families housed? And so it just encourages people not to keep on creating lists of metrics just because they can, but to say given my investing in this sector which is in this impact theme, let me see what others are tracking and try to kind of align with that. Similarly, you have the Impact Management Project, which is a very useful framework thinking about the different dimensions of impact. So, you know, what are you trying to do, who is this affecting, what are the risks that the impact may not be achieved? So again, there are ways in which we can try and consolidate how we measure impact but it is challenge, I will say.
THOMAS MUCHA: So there are standards developing around these measurement principles.
And you mentioned KPI a couple of times. You know, can you define what that is for our audience and why it’s so important?
OYIN ODUYA: So the KPI is the Key Performance Indicator that we allocate to every single impact issue. The idea is that we have a very heavily researched-led approach that says we are investing in affordable housing because we know that there’s a housing shortage in, the U.K. or in the U.S. or in India, for example. And we have a lot of academic research that shows if you give people — particularly those from low-income communities — access to affordable housing it can have a whole raft of social benefits which are individual in terms of more disposable income, better educational outcomes, or even community stability benefits. So we know that this is a good idea to invest in this sector. We want to be able to track the actual impact that these companies are having that that’s where the KPI comes in. So we can talk about is how many units of affordable housing have been built per year. Or this is the price differential from a person who is living in an affordable housing unit versus living in privately rented accommodations, for example, how much money are they saving per month or per year? And that can be in the impact KPI. It’s really about trying to put data behind the assumption, really, that we’re doing good through the investments that we’re making and it sometimes it can be quite straightforward. So I take the affordable housing one as something which is a little bit more easy to understand but it can be very involved. If you think about a generic drug manufacturer, for example. There’s a real benefit that we’re trying to capture through a generic drug manufacturer that’s making a drug which is cheaper than the branded version which increases access to affordable medicine which should increase their health care outcomes. The real benefit is… you could almost say is that increase in quality-life years experienced by people that have access to that medicine that they maybe otherwise wouldn’t have. And now that is very difficult to put a number on, right? Quite a lot of assumptions and could do a lot of modeling but you can’t do that for a whole portfolio of companies and so we could think about. You maybe can’t measure the extra life years afforded to people who have access to that medicine but you can measure the cost differential. We can say this medicine is 10, 20, 30 percent cheaper than the branded alternative and this is how many people are buying it, and therefore this is the overall cost savings to those people who can have access to the medicine. So that’s the kind of work that the impact measurement and management practice does. And we’re trying to support our investors in tracking the impact of their investments.
THOMAS MUCHA: So obviously a lot of creative thinking, a lot of communication, with investors across the firm. I’m curious could you tell us more about who you collaborate with across Wellington?
OYIN ODUYA: Yeah, it’s actually been really great to be part of a firm which is so collaborative. I’ve come from firms where I’m the only impact person, or I’m part of a newly formed impact team, and so it’s really great to be at a place where, you’re not working alone and you have a lot of peoplewho have input into your process. And so, first and foremost the impact measurement and management practice is here to support the investors to make sure we can track the impact of their portfolios and help them as they’re thinking about does this company belong in my portfolio? You know, I’m there as a resource to help them to research does this fit or does it not fit. And so that’s kind of one of my primary roles. And there’s also a lot of the work that I mentioned around getting those KPIs. So it’s not just kind of scanning sustainability reports and disclosures, although that is a part of the role, but thinking where that data doesn’t exist. Working with the scientists we collaborate at Woodwell, working with our Climate Research Team, working with the global industry analysts and the ESG analysts to really try and come up with is this a sensible assumption? Do these numbers look right? Because at the end of the day, I think the most important thing when you think about impact measurement is transparency. We know that it’s very, very difficult to get the exact right KPI that you need. Really, all we’re trying to do is get the best possible proxy and to be able to have kind of a whole wealth of resources at the firm who can tell you whether your assumptions make sense or not has been really invaluable to me.
THOMAS MUCHA: The University of Wellington is a fun place to be. Oyin you’ve mentioned a couple times private experience, public experience, and also your experience in emerging markets. You sort of have this perfect Venn diagram of experience. How does your background in EMs inform your views on these issues?
OYIN ODUYA: I think it’s been having had experience working with investors in EMs for probably the majority of my career, it has really taught me that there aren’t always clear-cut answers. I think is the easiest way to put it. So I spent a big part of my career on the sell side as a Sub-Saharan African economist, so looking at African sovereign credit and then on the private investing side worked at funds who were doing growth-stage investing in both Africa and Asia. And so kind of getting an understanding of how emerging market economies are and how they intend to develop, I think has really thrown up difficult issues. So something that comes up very often is the tension that you sometimes get between environmental and social goals and outcomes, right? So, you have a situation currently where there are hundreds of millions of people in Sub-Saharan Africa who do not have access to electricity and we know that access to electricity is one important determinant of development whether that be the ability to build a manufacturing base or just the ability to be able to light your home and cook without using kind of dangerous fuels, for example. It’s a really important, basic service to be able to have. But you have this strange tension where a lot of impact investors see emerging markets and think about electricity access and all they want to see is solar, which is a great distributive solution in economies where the grid may not be up to scratch. But the reality is the fastest and most effective way to get people connected to the grid actually is through the grid. And so if you’re looking at a country — say like Ghana — where they have gas produced could a gas-fired power plant be an impact investment? Well, of course, it's a fossil fuel. It’s creating environmental pollution, contributing to global warming through greenhouse gas emissions. It’s not good for the environment, but it’s probably less-polluting than the next best alternative and it creates a whole plethora of social benefits, which I already mentioned. And so trying to have those conversations to understand really the net impact, trying to net environmental against social outcomes. That is not an easy thing to do. But, when you’re thinking about emerging market investing these are the conversations that you have to have and so I think EM investing has taught me that you have to be quite specific about what it is that you’re trying to do. Follow the data and not what people kind of what to see or think impact should be and really understand what’s happening on the ground. I think that’s the key lessons I’ve learned from being involved in EM investing.
THOMAS MUCHA: Now obviously in EMs but also globally the past couple of years have been rather extraordinary in terms of what’s happening around the world with the global pandemic. the economic and macro impacts of that. And now we have this this continuing war to deal with refugees. And of course climate is on top of that. How have the past two years impacted your research process? I mean, are you thinking differently about the world given the intense challenges that we’ve seen?
OYIN ODUYA: I think so, yeah. I think that in impact investing we can sometimes be guilty of maybe being a little bit too philosophical or thinking a little bit too far into the future. Of course, we have these huge structural issues which are going to take a long time to solve and really a lot of them require huge policy and sea change to be realized. And I think when you have such immediate and pressing concerns like the pandemic, like a war, you have to think not just about, where are we gonna be in 10 years’ time, but where are we gonna be in two years. What I would also say is what’s happened over the past few years, particularly with the pandemic, I think an increasing expectation of what people think private sector actors should do. And they should at least not make some of our biggest social problems worse if they can’t contribute to making them better. So whether it's more consciousness of global and local inequality the understanding of how urgent the climate crisis, the fight for racial justice. There’s so much more things which are, I think, front and center in people’s minds and they weren’t before. And to be able to channel that into how you invest I think has been a big change and so that kind of really affects how I think about impact investing day to day.
THOMAS MUCHA: I’ve seen that firsthand in my research process as well. Crisis is clarifying whether it’s a pandemic or a conflict or the long-term impacts of climate change. The dialogue with policymakers has certainly become more urgent as well. The dialogue with policymakers has certainly become more urgent as well. So wrapping up here, if you weren’t doing this job for Wellington, what else might you be doing with your life?
OYIN ODUYA: I think if I could do anything, I would probably want to be a musician. I love music. I used to play piano in a jazz trio. We used to do gigs in and around London. And if I could make a living doing that I would love to just do that. Just play music, tour around, maybe record a few albums.That’s what I would love to do.
THOMAS MUCHA: Who’s your favorite jazz pianist?
OYIN ODUYA: That is a very tough one. I am gonna say...
THOMAS MUCHA: Bill Evans.
OYIN ODUYA: I was gonna say Bill Evans but you know what, I don’t even have a favorite jazz pianist. I have a favorite jazz bassist. Her name is Esperanza Spalding.
THOMAS MUCHA: Oh yeah. Of course.
OYIN ODUYA: She’s incredible. And I have to say, I really love her music more than any of my favorite pianists.
THOMAS MUCHA: Our next podcast you and I are gonna do will be about jazz.
THOMAS MUCHA: Well Oyin, we’re certainly grateful that your path led here. Thank you so much for your time and your expertise today in helping us understand this really interesting and really important topic. So thank you.
OYIN ODUYA: Pleasure.
Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced June 2022.
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