The role of Impact Investing on solid long-term strategies

This Q&A is reposted from The Economist Events’ Impact Investing speaker blog. Visit www.economistimpactinvesting.com to read Roland’s original post, along with the rest of the conference speaker Q&As.

The Economist | Please give us a bit of background on yourself, and how your organization plays a leadership role in the impact investing space.

Roland Lescure | I have been the Chief Investment Officer of Caisse de dépôt et placement du Québec since 2009. My experience is a beneficial mixture of North American and European experience in both the public and private sector.

CDPQ has quite a unique model in the world of pension management. Our mandate is not only to ensure financial returns for our clients; we are also tasked with generating a positive impact on our domestic economy. This means investing in small and medium enterprises (SMEs), providing them with strategic guidance and access to our network and supporting their long-term growth, as well as making direct investments in the real economy such as infrastructure and real estate projects.

We’re also very transparent in our holdings and processes, and rightfully so, considering we are accountable to the public. While many institutional investors would consider our transparency an operational hindrance, we consider it an opportunity to showcase our ability to generate financial returns and benefit the Quebec economy while investing responsibly. 

Essentially, we see ourselves as business builders and owners, rather than strictly investors

We didn’t wait for impact investing and SRI to become a trend – we were the first institution in Canada to adopt a policy on socially responsible investing (SRI), in 2004. We were also among the original signatories of the United Nations’ Principles for Responsible Investment. Moreover, we’re active members of the Carbon Disclosure Project and the Water Disclosure Project.

TE | What is your approach towards adopting SRI principles?

RL | At CDPQ, we invest with a view towards gaining in the long-term. Essentially, we see ourselves as business builders and owners, rather than strictly investors. This thinking, we believe, gives us a competitive advantage in relation to SRI; it allows us to reconcile profitability and social responsibility – to use an “and” philosophy instead of an “or” philosophy.

Our approach to adopting SRI principles is twofold. Firstly, we invest in industries which traditionally have positive impacts. For example, we’ve set our sights on the infrastructure sector in Quebec and abroad by investing in green energy and public transportation projects. These investments result in obvious benefits to the economy and to the environment.

Our approach towards SRI stems from our belief that capital is easily replaced, but influence less so.

Secondly, we believe that positive change occurs through interaction and influence, and by collaborating with management teams. Our approach towards SRI stems from our belief that capital is easily replaced, but influence less so. For example, with very few exceptions, we don’t believe in all-out exclusion of certain industries or sectors. We like to build our portfolio by taking more concentrated positions in companies, giving us the capacity to interact with them and influence them, sometimes through a formal governance role. Through this, we can affect positive change on an organization’s environmental, social and governance (ESG) practices in order to support the organization’s adoption of best practices. We are active but not activists.

TE | Is the adoption of impact investing and SRI a hindrance on an organization such as yours and to institutional investors in general?

RL | We don’t see the increasing importance of impact investing as an impediment to the success of long-term investors. In fact, quite the contrary. We believe social responsibility goes hand in hand with long-term investment horizons, and in fact can be a driver of long term value. Our view is that what are considered non-financial risks in the short term will eventually converge to become financial risks in the long term. For example, while a company’s ESG policies may not affect shareholder returns from one quarter to the other, it’s been proven that in the long-term, companies with strong ESG principles face lower capital costs, something that is a clear benefit to the firm and its shareholders. Therefore, considering a company’s level of social responsibility in your investment analysis is a healthy risk management practice. It’s for this reason that our due diligence procedures incorporate SRI into their analyses. 

TE | What challenges do you see for the future of purpose-driven finance?

RL | The success of impact investing will also depend on governments and their policies. We can’t rely on private industry alone to propel impact investing; proper uses of government taxation and subsidies like carbon taxes will be required in order to incentivize economic agents to consider impactful investments over traditional ones.

Additionally, there’s a large risk of impact investing being dogmatized. While it’s easy to say that you’ll exclude an entire industry from your investment portfolio, we don’t think that’s necessarily the right solution. We believe the best change comes from a more constructive approach. In that respect, we must recognize that the transition to more responsible investing is a marathon, not a sprint. Impact investing is a new science and there’s plenty of uncertainties surrounding the measurement of the impact of purpose-driven finance. Notably, it will be essential to rally the major players in the industry. It will take time, research and open discussions in order to ensure impact investing succeeds in its ultimate goals.