IMPACT INVESTING MARKET MAP WHITE PAPER DOCUMENT FOR CONSULTATION An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact
WHITE PAPER - DOCUMENT FOR CONSULTATION FOREWORD The UN Sustainable Development Goals (SDGs) is a global initiative focused on ending poverty, protecting the planet and ensuring prosperity for all. It is projected that the economy needs US$4trn annually to achieve the 17 SDGs, with US$1.4trn from the private sector. The PRI is committed to supporting the UN s efforts and helping investors integrate the SDGs into their businesses and investment decisions. Indeed, we are currently developing a programme on the SDGs, including: an SDG Investment Case; guidance on how to incorporate the SDGs into asset allocation, investment decisions and active ownership; and contributions to initiatives in (corporate) reporting. Additionally, we want to help bring impact investing to the mainstream by working with a raft of investors and industry experts to develop an Impact Investing Market Map ( the map ). The map features information about 10 environmental and social thematic areas of impact investments and businesses that, by their nature, intend to contribute to sustainability and the SDGs. KRIS DOUMA Director of Investment Practice & Engagement, PRI As such, the map serves as a methodology to identify impact investing opportunities, enabling investors to expand their existing impact investing funds or incorporate ambitions to create positive impact through their regular portfolios. It has also been designed as a reference guide for mainstream investors interested in identifying primarily medium and large companies in the impact investing field. Ultimately, the aim of the map is to bridge the gap between the niche but growing impact investment universe and the broader economy. We hope it will show how investors can, with relative ease, begin contributing to the SDGs by investing in these markets through either a separate allocation or within their current asset classes. The PRI expects the map to support the many initiatives and efforts already underway to bring clarity and scalability to the impact investing industry and, in turn, consideration of the SDGs across regions and countries. 4
IMPACT INVESTING MARKET MAP 2017 DEFINITIONS AND CONCEPTS Impact investing is a part of a broader financial ecosystem that includes a variety of concepts, methodologies and frameworks. This section outlines the main definitions and concepts used in the map, with information based on references from Multilateral Development Agencies including the World Bank, UN agencies, the International Finance Corporation, as well as major data providers and international organisations that operate in the impact investing field. IMPACT INVESTING Companies and organisations that generate revenues (based on market-rate returns) from products, services, technology and infrastructure that deliver solutions (or positive impacts) to society and the environment. In this sense, impact investments refer to organisations outputs (i.e. products and services that are directly related to its business model and revenues), rather than inputs (i.e. ESG practices and policies, CSR initiatives and risk mitigation tools). Additionally, the concept of impact (both primary and direct) is associated with companies environmental and social (E&S) outputs only; governance factors are excluded. DIRECT IMPACT The World Bank defines direct impact as investments that have a direct and clear cause-effect relationship with an output (a company s products and services) 1. PRIMARY IMPACT The first impact generated by the output of a company. For instance, SME finance may provide micro-loans to small companies (primary impact) that could be used to purchase solar panels (secondary impact). THEMATIC INVESTMENT The map is organised based on thematic investments. In this project, the PRI defines thematic investments as investing categories that target specific social or environmental goals. The map covers 10 types of thematic investments, and these investments are part of the PRI Transparency Framework. 1. Both primary and direct impacts are similar, but the first focuses on the investment goal and the second on the beneficiary type. 5
WHITE PAPER - DOCUMENT FOR CONSULTATION INITIAL CONSIDERATIONS This section highlights initial considerations about the map, its purpose and methodologies. IT IS NOT A STANDARD the map gives investors a methodology to begin identifying impact investing companies. IT IS NOT A FRAMEWORK the map focuses on existing information about impact investing companies based on thematic investments. IT DOES NOT FOCUS ON TRADITIONAL OR NICHE IMPACT INVESTMENTS the map targets mainstream (high liquidity and maturity) impact investing companies, including listed equity firms and medium and large infrastructure projects. IT FOCUSES ON IMPACT INVESTING COMPANIES, NOT FUNDS the map targets companies and businesses (real economy) that operate in the impact investing field, not funds or investment vehicles. FOOTNOTES due to the quantity of studies involved in this project, footnotes will be added to the final version. FINANCIAL CONDITIONS each thematic investment has its own financial conditions, based on a benchmark of companies revenues covered in MSCI and FTSE indexes, as well as PRI signatory data. 6
IMPACT INVESTING MARKET MAP 2017 ABOUT THE MAP The impact investing field continues to grow apace: PRI data shows that 465 organisations made impact-related investments last year, representing US$1.3trn in combined AUM up from 280 and US$800bn respectively in 2014. Asset managers, fund managers and other service providers are seizing business opportunities related to rising demand for impact investment products and services globally. Players such as MSCI and FTSE are dedicating more resources to measuring the impacts that companies have beyond standard ESG practices, KPIs and ratings. However, the impact investment landscape remains broad as well as fragmented, throwing up a raft of challenges. Many terms and thematic investment areas (such as energy efficiency and affordable housing) have not been universally defined, making it difficult to identify benchmarks and set industry best practices. For those interested in pursuing a new impact investing endeavour, identifying relevant companies can be a complex and onerous task. The map is a valuable resource for institutions and individuals seeking to establish an impact portfolio or hone existing investment strategies. Importantly, it is not a standard to be followed or adopted by PRI signatories and others; rather, it is designed to help investors and investees navigate the impact investing world and make decisions accordingly. The map crystallises definitions, contributing to the formalisation of a much-needed industry language and ultimately serving as a reference guide for those working in this dynamic sector. The map was developed based on a study of over 450 reports from UN agencies, market leaders, universities, indices and data providers (i.e. MSCI, FTSE, Bloomberg), as well as interviews with PRI signatories and external stakeholders. Its methodology is based on companies that generate income from at least one impact investing theme, of which the PRI has identified 10: The Impact Investing Market Map cuts through the noise by serving as a simple yet practical tool to help asset owners, asset managers and fund managers identify impact companies based on specific thematic investing criteria. It is centred on definitions and practices established by organisations including the United Nations, World Bank and OECD, as well as other market leaders. ENVIRONMENTAL SOCIAL Energy efficiency Inclusive finance Green buildings Affordable Housing Renewable energy Education Sustainable forestry Health Sustainable agriculture Water 7
WHITE PAPER - DOCUMENT FOR CONSULTATION THEMATIC INVESTMENTS AND THE UN-SDGS The 10 thematic investments covered in the map seek to contribute to sustainable development, and thus usually relate to one or more of the SDGs: Thematic Investment Sustainable Development Goal Affordable Housing Energy Efficiency Education Sustainable Forestry Green Buildings Health Inclusive Finance Renewable Energy Sustainable Agriculture Water 8
WHITE PAPER - DOCUMENT FOR CONSULTATION The following diagrams provide more detail on how to read and use the map. PAGE 1 THEMATIC INVESTMENT: ENERGY EFFICIENCY Definition of a specific thematic investment Companies that generate their revenues from products, services, infrastructure or technologies that proactively address the growing global demand for energy while and industrial automation and controls, and optimization systems; infrastructure, technologies, and systems that distribution, power storage and demand-size management ; and technologies and products that focus on using renewable energy sources to transport vehicles. BASIC CRITERIA AND CONDITIONS Source Combination of MSCI Sustainable Index Global initiatives alignment United Nations Sustainable Development Goals Montreal Pledge Paris Agreement Source of the definition and the correlation of this thematic investment with the SDGs and other international initiatives Criteria and outputs (i.e. energy consumption, battery capacity); and b) companies that generate revenues from at least one type include companies or organisations that do not have both factors, independently of whether a company is part of an international or national association, network or community devoted to promoting, certifying, applying and/or investing Business/investment types Initiative types services and technologies to improve industrial operations turbines, motors and engines for industrial facilities. Industrial automation and controls ISO 50001 (or equivalent) ISO 20000 (for technology and services only) (or ISO 22400 (or equivalent) ISO 9001 (or equivalent) ISO 14001 (or equivalent) provide cloud computing, data optimisation systems and service management systems. Infrastructure, technologies and systems to improve power management, distribution and storage Ex: smart grid technology and products, advanced meters and clean tech products. Technologies and products that do not use fossil fuel consumption in transport vehicles. Ex: electric vehicles. Thematic investing criteria is organised by a) business or investment type (specific types of businesses implemented or delivered by a company operating in a specific thematic investment field) b) certifications that showcase a company s commitment to impact investing or to ensure its business is positively impacting society and the environment, and c) national and international initiatives that help differentiate companies that are committed to impact goals and those that are not 10
IMPACT INVESTING MARKET MAP 2017 PAGE 2 DATA IDENTIFICATION AND SELECTION Thematic conditions improve industrial operations ISO 20000 (or similar) ISO 50001(or similar) Financial conditions 1. Identify if a company or organisation generates its revenues from one or more products, services, technology and infrastructure as highlighted in the thematic criteria (see left box); Energy Performance (SEP) Comply with one or more initiative(s): Not applicable 2. conditions above, include only companies and organisations that generate more than 70% of their direct revenues through energy and projects as highlighted in this document; Industrial automation and controls ISO 22400 (or equivalent) ISO 9001 (or equivalent) Comply with one or more initiative(s): Not applicable Infrastructure, technologies and power management, distribution and storage 3. (If applicable) if a company invests in R&D, determine the percentage of its investments in the targeted theme (minimum 5% of total R&D investment allocation - year); 4. (If applicable) investments in R&D can substitute or complement a company s revenue conditions in item 2; 5. (If applicable) if a company generates revenues from two or more thematic sustainable agriculture, renewable energy, the thematic conditions box, total direct revenues through these investment types should be greater than 50% of total revenues. Basic financial conditions to identify impact investing companies based on themes ISO 50001 (or equivalent) ISO 14001 (or equivalent) Comply with one or more initiative(s): Not applicable Technologies and products that do not use fossil fuel consumption in transport vehicles ISO 50001 (or equivalent) Comply with one or more initiative(s): Not applicable Conditions (certifications and initiatives) required to be aligned with specific thematic investing businesses/investments The alignment of thematic and financial conditions helps investors identify impact investing companies PAGE 3 Further information to support investors work Additional information Financial incentives provided by a third party (i.e. governmental agency, non-governmental organisation or private entities) to support a company s operations targeting this thematic investment would be included as revenues/ assets under management. Unless explicitly highlighted in this document, investments related to ESG considerations (a company s inputs) and internal operations (i.e. low carbon footprint practices) will not be included in this thematic theme. A company s investments in grants, philanthropic initiatives and/or investments with no capital gains will not be included as a thematic theme. A company s impact on the E&S groups and individuals generated by philanthropic or corporate social responsibility (CSR) projects and programmes will not be included in this thematic theme. thematic investment and should not be included in its thematic investment revenues/assets. included in this thematic investment (i.e. company A providing machinery to company B that produces electric vehicles will not be included). Only direct revenues generated by products, services, technologies and infrastructure in the thematic investment above will be considered. (If applicable) if a company generates revenues from two or more types of thematic investments covered in the map, assess the individual thematic conditions of these investments and include companies and organisations that generate more than 50% of their direct revenues from two or more thematic investments covered. ADDITIONAL INFORMATION Collecting data The PRI s E&S team proposes two options to collect data based on the criteria above: 1. Use the information in this methodology as a reference: Data collection should follow all the conditions and criteria highlighted in this document. 2. Use the information in this methodology as a basic reference: Data providers or consultants may use the Information and suggestions on how to use and collect the data conditions highlighted on page 2 Common indicators used by the international community to track the outputs/outcomes of a specific thematic investment Common indicators The PRI s E&S team proposes two options to collect data based on the criteria above: 1. Use the information in this methodology as a reference: Data collection should follow all the conditions and criteria highlighted in this document. 2. Use the information in this methodology as a basic reference: Data providers or consultants may use the Indicator name Expected outcomes Metrics UN-SDG target Questions The PRI listed questions that asset owners, fund-of-funds and fund managers can use during the fund selection process, investment appraisals and due diligence processes. These questions are considered voluntary. When applicable, this section provides additional information including questions to be used by asset owners and fund managers in their work 11
WHITE PAPER - DOCUMENT FOR CONSULTATION ENVIRONMENTAL THEMATIC INVESTMENTS WATER 12
IMPACT INVESTING MARKET MAP 2017 THEMATIC INVESTMENT: WATER AND SANITATION Definition Companies that produce or deliver products, projects and services with the scope to provide basic sanitation and safe and fresh water to humans without compromising the quality and sustainability of water resources. This includes water waste and water utilities, water infrastructure and water technology. Source United Nations Convention on Human Rights for Water and Sanitation Global initiatives alignment United Nations Sustainable Development Goals Montreal Pledge Paris Agreement BASIC CRITERIA AND CONDITIONS Criteria Based on the United Nations definition above, companies that operate in the water sector must fulfil three pre-criteria conditions, and are divided by complexity: a) projects, products and services that target sanitation and water b) criteria a has to be achieved by providing safe and fresh water to support individuals hygiene c) all the pre-criteria b should not compromise the quality and sustainability of the water resources. Based on these three pre-criteria, PRI identified the following certifications, initiatives and investments that, combined, can be used to identify investments in the water sector. Business/investment types Certification types Initiative types Water waste and water utilities Ex: companies managing infrastructure and the delivery of water and/or treating wastewater or reuse and safe remediation back into the environment. Water infrastructure Ex: companies providing pipes, filters, pumps, seals, valves, water purification and desalination equipment, design engineering and construction services. Water technology Ex: companies providing filtration, disinfection, test and measurement products and metering. ISO 9004 (focuses on how to make a quality management system more efficient and effective) SO 14001 (environmental systems) ISO 17025 ISO 24510, ISO 24511 and ISO 24512 (for services activities for drinking water supply and wastewater systems) ISO/TC 147 (for water quality) SO 14046 (for water footprint, see pre-criteria 3 ) ISO/TC 138 (for water infrastructure) ISO 11298-1:2010 ISO 11298-1 (for water infrastructure, focusing plastics pipes systems and for renovation of underground water supply networks) ISO/TC 5/SC (for water infrastructure, focusing cast iron pipes) ISO 559:1991 (for water infrastructure) ISO/TC 153 (for water infrastructure, focusing valves) ISO 9001 NASSCO Country level certification (if applicable) Any other similar certification aligned with those highlighted above (if applicable) Water Quality Association Canadian Quality Water Association (UK) Pacific Quality Water Association Easter Water Quality Association (USA) Any other regional, national or international association 29
WHITE PAPER - DOCUMENT FOR CONSULTATION DATA IDENTIFICATION AND SELECTION Thematic conditions Financial conditions Water waste and water utilities Comply with one or more certifications (mandatory): ISO 24510, ISO 24511 and ISO 24512 (fresh and safe water) ISO/TC 147 (fresh and safe water) ISO 14001 (sustainable water management) ISO 9004 (sustainable practices) ISO 14046 (sustainable water management) Comply with one or more initiative(s) (voluntary): Be a member of a local/regional/national water association or association that aims to improve water and environmental impact in society and the environment overall Industrial automation and controls Comply with one or more certifications (mandatory): ISO 22400 (or equivalent) ISO 9001 (or equivalent) Comply with one or more initiative(s): Not applicable Technologies and products that do not use fossil fuel consumption in transport vehicles Comply with one or more certifications (mandatory): ISO 50001 (or equivalent) Comply with one or more initiative(s): Not applicable 1. Identify if a company or organisation generates its revenues from one or more products, services, technology and infrastructure as highlighted in the thematic criteria (see left box); 2. For those organisations that fulfil the conditions above, include only companies and organisations that generate at least 70% of their direct revenues from water projects, infrastructure, products or services; 3. For those organisations that generate their revenues from water technologies that fit into the criteria on the thematic (left box), identify companies that generate at least 20% of their direct revenues from water technologies; 4. (If applicable) if a company invests in R&D, determine the percentage of its investments in the targeted theme (minimum of 5% of total R&D investment allocation - year); 5. (If applicable) investments in R&D can substitute or complement a company s revenue conditions in item 2. In this case, revenues and R&D investments combined should represent the company s revenues in items 2 or 3; 6. (if applicable) if a company generates revenues from two or more thematic investment types (i.e. energy efficiency, sustainable agriculture, renewable energy, affordable housing, etc.) highlighted in the thematic condition box, total direct revenues through these investment types should be greater than 50% of company s total revenues. 30
IMPACT INVESTING MARKET MAP 2017 Additional information Financial incentives provided by a third party (i.e. governmental agency, non-governmental organisation or private entities) to support a company s operations targeting this thematic investment would be included as revenues/ assets under management. Unless explicitly highlighted in this document, investments related to ESG (a company s inputs) and internal operations (i.e. low carbon foot print practices) will not be included in this thematic theme. A company s investments in grants, philanthropic initiatives and/or investments with no capital gains will not be included as a thematic theme. A company s impacts on the environment and social groups and individuals generated by philanthropic or corporate social responsibility (CSR) projects and programmes will not be included in this thematic theme. A company s financial operations (i.e. company A purchases green bonds from company B) will not be included as a thematic investment and should not be included in a company s thematic investment revenues/assets. Only a company s direct produce goods, services, technologies and infrastructure related to this specific theme will be included in this thematic investment (i.e. company A providing machinery to company B that produces an electric vehicle will not be included). Only direct revenues generated by products, services, technologies and infrastructure in the thematic investment above will be considered. (If applicable) if a company generates revenues from two or more thematic investments covered in the map, assess the conditions of these investments and include companies that generate more than 50% of their direct revenues from two or more thematic investments covered. ADDITIONAL INFORMATION Collecting data The PRI s E&S team proposes two options to collect data based on the criteria above: 1. Use the information in this methodology as a reference: Data collection should follow all the conditions and criteria highlighted in this document. 2. Use the information in this methodology as a basic reference: Data providers or consultants may use the PRI s methodology as a reference to support their work collecting similar data for a specific theme. Common indicators For measurement performance, PRI identified basic common indicators used and adopted by investment companies, global initiatives and international organisations to track, monitor and measure the performance of this specific thematic investment. Information provided in this section is organised by: To be completed in the consultation process Indicator name Definition Expected outcomes Metrics UN-SDG target Questions The PRI listed questions that asset owners, fund-of-funds and fund managers can use during the fund selection process, investment appraisals and due diligence processes. These questions are considered voluntary. 31