Investments

Sarah Simon

10 min Read Time | August 10th 2021

Key Takeaways

Financial investments are a powerful tool that can have long-lasting social or environmental impacts.

The past three years’ investments are considered relevant - unless you can prove that older investments have long-lasting impacts that are still relevant today.

For equity investments or holdings, the financing must be direct, and the financial institution must hold at least a 5% ownership or must exert influence on how a company is managed.

For debt financing, the investments must be greater than USD or EUR 100 million.

For impact scale assessment purposes, you should describe the investments in the broader context, i.e. how much is this investment compared to overall investments, or what proportion of the global financing received by the project came from the financial institution.

Caution: integrating ESG considerations into the investment/credit process is an input, not an output/outcome/impact. Even though this information can provide some context, describing the ESG policy of a bank or fund manager should not be the core focus of your analysis.

Topics

If you want to discuss the impact of a bank through its investments, then the correct topics to choose from are:


If you want to discuss the impact of a bank through its donations/ philanthropy work, then the topic to choose is:

  • Community Relations


The topic Labor Practices is reserved for discussing labor practices specifically within the company’s workforce and supply chain.

When relevant, you may also compare the financial institutions with their competitors. Read our article “How to compare companies” to learn more.

What is it?

Financial services serve as a powerful tool for raising funds that enable countries and companies to improve their economic condition. It not only generates income that grows over a period of time but can have long-lasting social and environmental impacts depending on the companies’ activities. Financing activity can equally be responsible for devastating ecological impacts.

Investments can be broken down between equity investments or holdings and debt financing, and both can have enduring impacts.

There is a clear distinction between financing and investment activities.

Financing:
loans or equity that can be owned on the bank's balance sheet or passed on to investors. This typically involves equity and corporate bonds.


Investment:
any loan or equity owned directly by the financial institution through their investment activities. Examples include pension funds, retail equity and bond funds, and portfolios of their private clients. In this instance, the investment risk is not borne by the financial institution, but by the end-client. Hence, the notion of the holdings not being on the bank's balance sheet.



Equity Investments or Holdings

In equity investments or equity holdings, either an entity or an individual makes an investment in a share of a company’s profits and dividends, where the capital does not need to be reimbursed. As a result, the investor now owns a percentage of the company, potentially even a controlling one.

Equity investment and holdings examples: preferred and ordinary shares, Exchange Traded Funds (ETF) or equity funds, Equity Derivatives (options, warrants, futures, swaps).


Note
: Please focus on equity investment or equity holdings, and not equity financing, as the latter refers to capital market activity where the bank raises fresh equity for companies with external investors (for example an IPO or equity listing).


Debt Financing

Debt financing is usually offered by a financial institution to a company in exchange of interest and capital repayments until the debt is paid off.


There are two types of debt financing:

  1. Direct loans made by a bank to corporations (generally smaller companies).

  2. Syndicated loan or bond where the banks act as an intermediary, and the debt is with institutional or private investors (generally large companies).

Debt financing examples: corporate loans, corporate bonds, revolving credit.



Sources

https://www.investopedia.com/articles/pf/13/business-financing-primer.asp
https://www.investopedia.com/terms/d/debtfinancing.asp#:~:text=Debt%20financing%20occurs%20when%20a%20company%20raises%20money%20by%20selling,bonds%2C%20bills%2C%20or%20notes.

How you should treat it

Your analysis must focus on this specific question and document how much the financial institution is having a positive or negative impact through its financing and investments activities.

In other words, your analysis must focus on this specific question: What is needed in the analysis to make sure the link between the financial institution and deforestation, Human Rights abuses, and others is strong enough? and document the extent to which the financial institution is having a positive or negative impact through its financing and investments activities.

You can look at how much money the bank has either invested or financed into a specific industry (e.g. renewable energy), a specific activity (e.g. oil exploration) or a specific instrument (eg. green bonds) to determine whether, and how much, it is putting capital at work for positive or negative impact.

For example, if a bank has raised money in the form of a green bond on behalf of a corporation, then this would be considered financing.

If a bank manages a large pool of assets on behalf of investors, then it is considered an investment.

In your analysis, you should focus on investment or financing being made by financial institutions into projects/companies/sectors having either a positive or negative impact.


In your analysis, try to quantify the impact of the investment using the IMP framework:

  • What is the impact of these investments (either positive or negative)?

  • How much impact is created through these investments?

  • Who or what is affected?

Remember that an investment is mainly an input, and at Impaakt, we try to measure the output, outcome and impact of a company's products and services.


If a company uses both financial instruments (debt & equity) as well as direct and indirect financing, you may discuss the aggregate in one analysis if it relates to one specific topic, i.e., deforestation, or exploitative labour.



Equity Investment
: Financial institutions can invest in companies directly or indirectly. To assess how attributable the impact is on the financial institution holding shares or stakes in a company, all of the following must be considered:

  • The investments must be direct. Direct investments involve gaining an interest in a company, providing the investing party effective influence. Larger financial institutions controlling significant stakes in companies end up having some form of control, often involuntarily.

  • As a general rule, the interest must reach a minimum of 5%. Such a level suggests that the financial institution is likely to have an influence (such as the appointment of Board members) on how the company is being managed. Of course, this is a soft limit, as a company may have a 3% stake or share and still exert influence, typically for a very large company without significant shareholders.



Debt Financing: To assess how attributable the impact is on the financial institution providing loans, bonds, and/or credit in a company, the following must be considered:

  • If loans amount to over >USD or EUR 100 million, then we can assume the loans are significant.

  • For impact scale assessment purposes, you should describe the investments in the broader context, i.e. how much is this investment compared to overall investments, or what proportion of the global financing received by the project came from this specific financial institution.

  • The more details that can be provided about the type of investments, the better. This includes: how much the loan accounts for out of the total funding needed for a specific project or activities, how many projects or activities it is funding, and the context. The minimum requirement would be to know how much the financial institutions provided in loans.

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