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Interview with Tancredi Cordero di Montezemolo

Prospects for a sustainable future. How the impact investing and ESG market is evolving.

We talked to Tancredi Cordero di Montezemolo, the founder and CEO of Kuros Associates, a London-based asset management advisory company specialising in sustainability and investment funds that are independent of big asset management groups.

The world of socially responsible and sustainable investments is growing like never before. According to the Global Impact Investing Network’s Sizing the Impact Investing Market report, the current size of the global impact investing market is estimated to be USD 502 billion. Therefore, this significant global increase in the number of impacts investing or ESG strategies and products over the past few years doesn’t come as a surprise.

What are the aspects that draw impact investors’ attention today? How do investors perceive socially responsible investments?

“In terms of sustainability and socially responsible investments, we’re probably in the early stage of a revolution. It all started in 2016 with the Paris Agreement, but the coronavirus pandemic has been the real tipping point. For years, economic theory suggested that shareholders’ remuneration was the ultimate goal of any company or corporation. However, in the words of Bob Dylan, times they are a-changin’. Today managers need to justify their remuneration and shareholders, their dividends. Sustainable business also drives better stock performance. – For example, empirical researches from Harvard Business School [1] have shown that gender-balanced management teams help to prevent decision-making imbalances. Managing a business sustainably makes work more pleasant, reducing sick leaves and stress in general while increasing productivity. Even the chances of incurring fines from regulators are reduced. All this allows companies to overperform. It’s a revolutionary approach. What was once considered a cost is now a positive economic driver. Up to a few years ago, investments were assessed based on a bidimensional risk-reward ratio. Today instead, investments are three-dimensional as they include the positive impact of social responsibility, alongside shareholders’ returns and risk – the satisfaction of contributing to the global economy! This is just the beginning, but in 10 to 20 years, all investments trade-off models will account for positive impact coefficients.”

ESG and green finance are drawing global interest. What size can this global market have and what will be the future trends?

“These markets are difficult to size. The potential value of the ESG market is enormous. If, for example, we assume that all listed companies across the world will integrate sustainable scores in their financial statements at some point, the ESG market will be as big as the market capitalisation of all public markets globally. However, ESG is a score. There’s no winning or losing. You can only do well or poorly. Impact investing, on the other hand, is less trackable, as it’s typically related to private companies and often concentrated in emerging markets, which are even more difficult to size. Impact investing is more stringent than ESG and requires a relatively higher impact than ESG to be defined as such. In terms of inflows, ESG and impact investing will benefit from major capital injections in the coming years. This is the beginning of a long wave.”

How is microfinance seen in this context?

Microfinance must continue to grow for the benefit of our global economy, especially in developing countries, but not only. We are living in a world of zero-to-negative interest rates, which paradoxically ended up discouraging large banking groups from lending to smaller businesses. A world that demands continuous growth, alongside a reduction of the gap between developed and emerging economies, definitely needs microfinance; and although microfinance has existed for centuries, today it can be considered the most notable form of impact investing. That’s why I think (and hope) that microfinance will keep on growing.”

Social impact and digitisation. How does the future of sustainable investments look like?

“The Covid-19 pandemic has triggered an economic recession whose consequences are more or less severe depending on the analysed countries and macroeconomic assumptions for the coming months. However, the first half of 2020 proved us that we’re living in a world where everyone can be digitally versed, regardless of age and background. Digitisation is unstoppable. It started a few decades ago with the internet and then progressed through smartphones and the like. Now, it’s Industry 4.0. I believe that over the next few months tech companies will be the ones to watch, especially the ones within the software, internet, cloud, 5G and cyber-security sectors. Technology will drive growth for years to come, and of course, the worlds of impact investing, ESG, and microfinance will have to align for technology to be a part of them. I can see digital applications helping borrowers to manage the repayment of a loan or to lease a new machinery piece. And this is just the beginning. In some countries, they’re already available. Technology will bring digitisation, the internet, and instant long-distance communication in developing regions, such as Africa and some parts of Asia. However, it will be important to preserve local customs and avoid economic colonialism. I do hope that all developed countries in the world have learned from their mistakes. We’ll see.”

How do investors and family offices see microfinance, impact investing and ESG?

“It depends on how senior is the “head of the family”. In general, microfinance, impact investing and ESG are seen positively. However, the “old guard” still sees ESG and impact investing the same way they did in the past. They don’t feel that their positive impact compensates the reduced liquidity or tamed average returns. Obviously, this is not necessarily true. Younger generations, on the other hand, are willing to allocate more to social impact investments. This growing trend is also linked to the lower opportunity cost resulting from the lower returns posted by asset classes traditionally considered safe like fixed income (once again thanks to lower interest rates). However, it’s important to stress that impact investing is unique because its average expected financial returns are much lower compared to public markets or more speculative investments like private equity. For the main expected return is the positive impact generated by the capital invested. ESG, on the other hand, is appreciated and understood by many more investors, regardless of their financial culture or age. We are still at the beginning of this new and exciting age, in which ESG, microfinance and impact investing will drive the financial industry towards a more sustainable future. Let’s hope that this future will be better for everyone and not just for the mighty few.”

 

Tancredi Cordero di Montezemolo
Tancredi is an Italian entrepreneur based in London. He graduated from Bocconi University and is participating in the Impact Investing Programme at Oxford University Saïd Business School. Over the years, he covered different roles at Mirabaud Asset Management, Fidelity International, and BNP Paribas Investment Partners. Then, in 2017, he launched Kuros Associates.

References:
[1] Harvard Business School – An Institutional Approach to Gender Diversity and Firm Performance

Tancredi Cordero di Montezemolo
Kuros Associates