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Big Three Credit Rating Agency Courts Impact Investing at Right Moment

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Superstorm Sandy hits New Jersey Pier, United States. Global warming makes superstorms like Sandy more destructive today.

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Superstorm Sandy hits New Jersey Pier, United States. Global warming makes superstorms like Sandy more destructive today.

NEW YORK  — It’s not without rhyme or reason that a credit rating agency like Moody’s Investors Service suddenly takes an interest in the impact investing field. For Mark Tulay, program manager at Global Initiative for Sustainability Ratings (GISR) and founder and CEO of Sustainability Risk Advisors and Sustainability ROI, this institution has good reasons to do so. “Credit raters see that climate change could, or likely will, lead to an environmental crisis that will create the next economic crisis,” said Tulay at the TBLI CONFERENCE USA 2014.

Seeing the writing on the wall, credit agencies are exploring new partnerships and services, such as impact investing, that might help offset the climate problems awaiting us. Moody’s clients, who are corporations, government entities and structured finance securities, also have valid reasons to fear this coming threat. As a result, they are turning to new strategies to take into account future environmental challenges.

“Managers believe that there is some increasing value in ESG factors and risks. They are actively employing those factors in their strategies,” said Henry Shilling, senior vice president at Moody’s Investors Service. Financial institutions such as asset management companies have integrated environmental, social and governance factors, or ESG, in their investment strategies. Until now, the emphasis has been on the equity space, but it is currently turning to the fixed-income space, which has a larger potential.

But it all comes back to “how do you determine when will the financial impact of climate change hit the companies’ bottom line,” Tulay said. That is the question that many economic actors are asking themselves. To respond to its own preoccupations, Moody’s is turning to impact investing because it aims to reduce humankind’s footprint on the environment with “investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return,” according to the Global Impact Investing Network (GIIN).

However, in order for investors to know what social or environmental impact they’re serving with their impact investments, measures and ratings are needed.

About five years ago, different organizations active in the sustainability space agreed that it was necessary to have “a third-party methodology for evaluating impact so that investors could understand the impact that they were having in a larger context,” explained Flory Wilson, director of B Analytics and GIIRS at B Lab. Measures such as the GISR and the Global Impact Investing Rating System (GIIRS) have been launched since then.

In 2011, the GISR was introduced by Ceres and Tellus Institute, organizations active in the sustainability space for more than 20 years. It aims to develop a rating standard that will accelerate sustainable development worldwide. On the other hand, GIIRS is an initiative of B Lab, which created a certification system for sustainable enterprises. GIIRS assesses the social and environmental impact of companies and funds.

As impact investing measures, GISR and GIIRS aren’t without flaws. Enterprises with which impact investors and funds work are from different sectors working to solve various types of social or environmental problems. Therefore, any measures used must take into account this diversity. “What may be impactful in one sector might not be so impactful in another,” said Shilling.

For Moody’s the aim could be the same as that of the existing measures: to find “a singular symbol that is universally recognized and accepted as a basis for evaluation,” said Shilling. “There is an interest in developing a set of terms that everyone can agree on, and harmonizing various views around the meaning of impact and, to the extent [that] those views can be honest, create a shorthand symbol for expressing those views.”

Yet Shilling remains unconvinced that the existing framework lends itself to the creation of a shorthand symbol that expresses an ultimate view of a desired impact. “The biggest challenge is to define what is the definition of impact. That is going to be a challenge because your definition of positive impact and my definition of positive impact might be very different,” he said.

Tulay echoes this sentiment, saying that “we need to have a shared general understanding of what impact investing is” before it can be measured.

Therefore, for the moment, Moody’s is still in a research phase in impact investing, exploring what opportunities it offers.

“Given the increasing interest in this area, we thought it would be useful for the firm to understand what is inspiring, why are these trends transpiring and why there is a role for Moody’s in this area,” said Shilling. “Our interest in this space is multifaceted and extends beyond impact ratings. But impact ratings could be one avenue that we may choose to pursue in the future.”

The very size of the impact that credit raters like Moody’s could have in the field makes Tulay see even just their courtship as a positive, “if credit raters are in this field, they have a huge impact. It is a sign of hope.”

Ed. note: Mr. Tulay’s position with GISR was added on 11 July, 2014.

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