Sustainable finance? It's all about making the trade-offs work.

As awareness and thinking around environmental, social and governance (ESG) issues have shifted at societal levels, so too have the priorities, values and strategies of many of the world’s largest financial institutions, corporations and venture capitalists. Where phrases like sustainable finance and impact investing might only recently have been considered oxymorons, doing the right thing—the equitable, responsible and transparent thing by communities and the environment we live in—is becoming big business in the 21^st century. So big, in fact, that some estimates put the size of the global impact investment market at more than $1 trillion.

And there’s little doubt that impact investing can yield promising results. During the Covid-19 pandemic, the race for a workable vaccine was hugely accelerated by unprecedented collaboration between the private and public sectors, with a large number of private equity firms injecting cash at each critical step, from the lab to large-scale rollout efforts around the world. Elsewhere, impact investors are increasingly doing their bit to put a dent into challenges as diverse as climate change and decarbonisation through to education and financial inequity. Industry behemoths like Black Rock have set up dedicated impact teams committed, in their case, to reaching unbanked and underserved communities in emerging markets and on the wrong side of the so-called digital divide.

But even as the sustainable finance and impact investing market matures and grows in complexity and sophistication, it’s still not entirely clear how firms can and should develop the best strategies for positive impact that nonetheless generate attractive financial return and drive the bottom line.

For one thing, any gambit that seeks to secure win-wins in dollars and ESG goals will need to negotiate certain trade-offs; many of them intractable.

One of trade-offs that we hear a lot about in our work at LSE (and which has become the focus of a lot of Martin’s own research) is the tension between exit and voice: whether to screen for or even divest shares in a company that doesn’t adequately tick your ESG boxes—oil and gas firms, say, or polluting firms with high carbon footprints—or to continue to invest, but then try to have some say about policies and behaviours.

What is the right thing to do in these scenarios? Instinctively, many investors back away from bad ESG bets. Those investors with a green agenda or those who are vocal about their commitment to sustainability will not want to be associated with the Exxon Mobils, Total Energies or Shells of this world. But here’s the thing: in all likelihood it is the incumbent energy players who have the expertise, the experience (and in many cases, the green patents) to really move the needle on fossil fuels and lead us towards the green and renewable transition. Then there’s the question of what happens after you screen and walk away or divest your interest in companies like Exxon. Someone else is likely to come along and buy those shares—someone who may care a lot less about carbon emissions than you do. And in a worst-case scenario, this new investor is now in a position to seamlessly replace the capital that you as an impact investor have withdrawn, so your divestment has zero effect.

But if you stay, how do you enact agency? How do you have a voice in the strategic direction the firm will go on to take? What kinds of conditions or financing terms can you institute to change behaviour, move the dial on sustainable practices, and fight the better fight?

We’ve dedicated a lot of our research to looking at the challenges ahead of firms and investors that want to commit to sustainable finance and impact investing. And we’ve been able to determine some best practices, and distil those into practical and actionable insights for investors looking to chart their way in this complex, evolving and exciting space.

Those insights form the basis of a new programme that we are launching from the LSE campus in central London in 2023.

Sustainable Finance & Impact Investing seeks to give the big-picture understanding, the frameworks and the resources you need to make a quantum shift in how you manage the trade-offs ahead, and ensure you have the voice and agency to help drive real change.