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Impact investing is not just an investment strategy, it also means securing the future.

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Jörg Geier is an independent consultant and partner at PDIE Group, an international consulting and training network and think tank for sustainable innovation. He is a member of the Club of Rome and board member and programme director of the Arts & Nature Social Club, an association whose goal is to sensitise leaders to the challenges facing our planet. Read the interview with him here.

How do you assess the development of impact investing in recent years? Did it develop as you expected?

Jörg Geier: We are on the right track. However, we need to further accelerate our efforts to trigger the necessary economic and social transformation: The International Finance Cooperation's Investing for Impact report states that in 2020, 2.3 trillion US dollars were invested in impact issues. This corresponds to about 2% of global assets under management (AUM). Impact investing is still a small market niche, but one that is attracting growing interest. The European Commission published its "Strategy to finance the transition to a sustainable economy" in 2021. As part of the strategy, there are several packages of measures, including an EU taxonomy framework and standards for sustainable finance, which are intended to provide the necessary incentives for more impact investment. Such legal frameworks are essential to advance the sustainable transformation of the economy. So something is happening.

As the COVID 19 pandemic has shown, crises can even strengthen corporate resilience: an increasing number of investors recognise that companies with strong ESG practices performed better during the pandemic, further underpinning the sustainable orientation of corporate strategy. Nevertheless, there is still a lot of room for improvement: The measurability of impact is a necessary foundation to make further progress in areas such as CO₂ emissions and biodiversity. After all, an objective value can only be assigned in the financial world insofar as something can be measured. That's why more and more impact-oriented start-ups are popping up in this area.

In other countries, such as the UK, the government actively promotes impact investing. Do you think the German government could also make such a recommendation in the foreseeable future, or is impact investing still too little present in the country for that?

The coalition agreement of the German government published in November 2021 shows that the traffic light coalition wants to strengthen the market for sustainable finance in Germany. The previous government coalition had already launched the "German Strategy for Sustainable Finance" in May 2021 in order to establish climate protection and sustainability as key guiding principles for the financial sector. In the chapter on "Sustainable Finance", the coalition agreement of the red-green-yellow government primarily addresses EU initiatives already underway. The focus here is also on dialogue with the business community by integrating ecological and social values into existing accounting standards. The coalition parties also aim to implement minimum requirements at EU level so that the major rating agencies take sustainability risks into account in credit ratings on a mandatory basis.

The German Federal Financial Supervisory Authority is also working on a directive for sustainable investment funds on the basis of EU regulations in order to define how capital management companies must structure their funds in future if they want to describe or advertise them as sustainable. Nevertheless, investing in shares has a different tradition in many Anglo-Saxon countries than in Germany. Therefore, in Germany, it is not only a matter of creating awareness for impact investing, but also for an understanding of investing that goes beyond the much-loved savings book, especially among older people. This may be an additional hurdle.

Will impact investing also reach the millions of small shareholders that now exist in Germany? So far there are only very few offers for them.

Jörg Geier: Not least because of the steadily growing interest in sustainable financial products among investors and small shareholders, the pressure on providers is also increasing. As a result, more funds are being offered that are subject to sustainable investment criteria. Exchange-traded index funds, so-called ETFs, could be an alternative to conventional funds. There are also sustainable variants of ETFs. Direct investments in individual stocks generally require greater background knowledge. Companies are also rated by rating agencies according to so-called ESG criteria; but in order to be able to classify them, different criteria and personal preferences, such as environmental or social concerns, often have to be weighed up.

In the long term, we will only be able to establish resilient systems if we humans live in harmony with nature.
Jörg Geier

Russia's invasion of Ukraine has thrown the global economy out of kilter. Supply chains are falling away, entire countries are being cut off from international trade. Does this also have implications for impact investing?

Jörg Geier: It is very difficult to make a general statement here. Whether a company will emerge stronger or weaker from this terrible crisis depends on many factors. These include the industry and the respective demand for raw materials. The smallness of the supply chain and the speed with which suppliers in countries not affected by the war or sanctions can be relied on also play an important role. If one has greater control over the production of important components in one's own company, imponderables and dependencies can be avoided if necessary. This applies in principle to all companies, whether they are sustainable or not. As the German government has indicated in the course of the war, the aim is to increasingly focus on energy independence in order to break away from the heavy dependence on fossil fuels. This in turn benefits the renewable energy sector, partly through subsidies. However, if we take the example of battery systems, which are playing an increasingly important role in the intermediate storage of sustainably produced electricity, then here too there are dependencies on certain raw materials. These are often extracted in only a few countries - sometimes under questionable conditions - while demand for them tends to continue to rise.

The crisis shows very clearly how dependent we have become on other countries in a globally networked economy. While it was globalisation - including global supply chains, division of labour and social development - that made possible years of economic growth fuelled by ingenuity and innovation (albeit often at the expense of the environment), the downside is now all the more visible. As the authors of the well-known report to the Club of Rome, "The Limits to Growth", pointed out as early as 1972, complex systems - such as the global economy - are subject to interactions that cannot be divided into cause and effect with linear thinking. That is why it is so difficult to foresee the exact effects.

Would you say that the current events surrounding the war in Ukraine also represent a turning point for impact investing? What other challenges do you see in this context?

Jörg Geier: I would not relate the turn of the times specifically to the topic of impact investing. The crisis is a challenge for the global economy in general. If anything, it can be said that the impact orientation of an investment is more important than ever. Apart from returns, it is increasingly important to look at what benefits an investment achieves for society or the environment - and which regimes are promoted by investments. It used to be assumed that global economic interdependence would prevent wars through interdependence. Now, in a tragic way, we have been taught otherwise.

The Nord Stream 2 gas pipeline is the best example of a failed energy policy that did not diversify enough and instead led Germany into a one-sided dependency. This concerns not only investments in individual companies, but foreign direct investment in the broader sense. The countries where the companies are located should therefore also be scrutinised and what the situation is, for example, with regard to human rights on the ground. However, once you start to sort out the global connections and dependencies - political, economic and security - you quickly realise how complex the situation is and how difficult it is to resolve the interdependencies. In the past, a blind eye or two was often turned for healthy profits when it came to the impact on society and the environment. From an impact investing perspective, this should be avoided at all costs.

Impact investing is strongly associated with climate protection measures, even the UN named such investments as an important key to achieving the UN sustainability goals by 2030. Now there are wars, pandemics, mass migration. Is there a danger that climate protection will lose global importance as a result, and with it impact investing?

Jörg Geier: In the short term, the answer is unfortunately yes. But fortunately, in addition to consumers, largely spurred on by the Fridays for Futures movement, decisive forces in politics and business (including the financial sector) are also aware of the risks of non-trade. In order to avoid negative impacts on the economy, caused for example by environmental disasters such as floods or tornadoes, climate protection and sustainability will continue to gain importance as a means of risk reduction in the medium to long term. Consequently, preventive measures also have a positive impact on a company's profitability. With regard to a sustainable orientation of the economy, however, setbacks must still be expected.

Recently, France's President Emmanuel Macron announced that the country's own agricultural sector is seeking "agricultural independence" as a result of the Ukraine war. As part of the EU's Green Deal, he thus wants to prioritise productivity over the goals of sustainable agriculture. While other EU countries see it similarly, the German Minister of Agriculture, Cem Özdemir, is against it. Nevertheless, the long-term benefits brought about by a sustainable transformation of the economy should remain in the foreground. In my opinion, productivity and sustainability should not be played off against each other. In the long term, we will only be able to establish resilient systems - here I am thinking, among other things, of climate-neutral energy production through renewable energies as well as regenerative agriculture - if we humans live in harmony with nature. In the case of conventional agriculture, over fertilisation often results in high nitrate contamination of the soil, which in turn leads to groundwater pollution. The negative effects of coal combustion on the climate are well known. Sustainability therefore stands not only for environmental protection and social justice, but also for risk minimisation and economically strategic thinking. With a long-term investment strategy within the framework of an impact investing approach, impact-oriented companies can be positioned and thus risks minimised.

What is your assessment for the further development of impact investing in the next few years?

Jörg Geier: Impact investing will certainly continue to gain in importance, even if there will be downward swings in the trend line in the meantime. All indicators point in a positive direction.

How do you position yourself in view of the developments described above? And what does transformation with the help of impact investing mean to you?

Jörg Geier: Although it is commonly challenging to position oneself as a generalist and systems thinker, I see precisely this as an important characteristic: Exponential developments require us to adapt quickly and flexibly to new circumstances, especially when complex systems are involved. This applies to one personally as well as to companies and societies. Companies will only be able to survive in the long term if they think holistically and sustainably at the same time in order to respond to the changing zeitgeist. Impact investors have recognised this development and have aligned themselves accordingly. Impact investing is therefore not only an investment strategy, it is also means securing the future.

This article was written by Gideon Böss and first appeared in Impact Investing Magazine:

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