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This portfolio manager wants you to know the difference between ‘ESG’ and ‘impact investing’

Cyril Gouiffès, head of social impact unit/equity investments at the European Investment Fund, speaks on the “SRI and impactful investment strategies” panel hosted by the Chartered Alternative Investment Analyst Association (CAIA) at the Cercle Munster on Wednesday 7 September at 5:45pm.

The discussion will highlight the differences between ESG and impact investing, and the market dynamics in each space.

During an interview ahead of the event, Gouiffès talked about the EIF’s social impact fund approach and shared why he personally thinks socially responsible investments are important.

Aaron Grunwald: What exactly is your role at the EIF?

Cyril Gouiffès: At the European Investment Fund, I’m in charge of a team of five teammates, and together with my team, we are in charge of sourcing, structuring and closing investments in social impact funds, social impact accelerators and some social outcome contracts, also known as social impact bonds.

We’re also in charge of monitoring the portfolio of funds we’ve invested in previously. So we’re sitting on the advisory board of these funds.

It’s important to bear in mind that elsewhere in the European Investment Fund front office we have activities that generates positive social impact. We do not have the ‘exclusivity’ [within the EIF], but we do it from the venture capital perspective. So that means we are effectively a fund of funds, investing in funds that in turn invest in social impact or impact-driven companies founded by impact-driven entrepreneurs.

So you’re essentially a social impact fund of funds in the venture capital segment?

Yes. What’s a distinctive element for the EIF in the market: We were the first and still are the only DFI [development financial institution] in Europe to, when we invest in an impact fund, apply the so-called ‘impact measurement methodology’, whereby the carried interest, or the financial incentives of the intermediaries investing the fund, is not only tied to financial performance, but also to impact performance. So that’s an important element when it comes to qualifying impact investing, at least the way we see it. [Our] motto [is], ‘we aim to invest in companies that have a positive correlation between positive impact and financial performance.’

Can you give us a sense of the size of your portfolio?

Alltogether, our venture capital portfolio is composed of roughly 700-plus funds in Europe, which makes us quite probably the largest LP in Europe, [LP stands] for limited partner in a fund. And focusing on our impact portfolio, our impact portfolio is composed of around 70 funds. That’s a small portion of the overall [portfolio], like 10%, but it’s increasing in proportion year after year, also reflecting the dynamics of the underlying market.

What about assets under management?

As a fund, we’re managing capital on behalf of third parties. And in general, the resources we manage that are dedicated to social and climate impact amounts to, as of today and for the next five years, €2.3bn.

That’s your team and other investment teams together?

That’s the climate and social impact team. So if I were to just look at the assets managed for the impact strategy, so climate and social, we’re talking 2 billion-plus euros.

What will you be talking about on the “SRI and impactful investment strategies” panel and why do you think it’s important to share that with the audience?

We are going to talk mainly about why it matters to incorporate social and climate topics in an investment strategy: Why it does matter? How do we do it? What are the hurdles to increasing the pace of such investing? And what are the dynamics of this market?

The other important topic to address is: we have ESG, we have impact investing, we have different terminologies that perhaps all sit on the same axis of ‘social finance’. What are the differences between ESG and impact investing? And what are the differences in intensity? [We’ll be] discussing the fact that ESG is very much about reporting standards and a transparency commitment towards your investors community and beyond, while impact investing, beyond committing to obviously accept transparency standards, is actually an investment activity that seeks to invest and scale solutions to tangible social and environmental issues through innovation, basically.

Why do you think it’s important to have this distinction? ESG, obviously, is sort of a buzzword these days. Are you trying to sort of get away from the ESG hype? Is that is that your goal?

I would say, rather, trying to clarify these concepts that are, as you said, very much buzzwords and fashionable, which have a lot of upside and triggers a lot of opportunities, but also generate some threats that have to do with being very cautious about how you make your investment decisions.

The idea is more to give a refined view of what the socially responsible investment space is made of, and how you as an investor can take investment decisions, from an ESG-compliant investment opportunity down to a positive impact generating investment opportunity, that would be the idea. So I would say more along the lines of awareness raising and pedagogy around concepts that are often confusing and put together in the same bucket while there are real differences.

The conference is about why socially responsible investments are important. From your point of view, why are they important? I mean, can’t we just comply with the rules and try to make a nice profit? Why is it important to go a bit further?

Very good question. I would say, first of all–my subjectivity kicks in here, I’m obviously wearing an EIF hat–I believe what matters is to not assume that finance is evil. Finance is like blood in our body. Finance is there to irrigate a fruitful and sharing economy.

Second, states, NGOs, foundations, companies, corporates, startups, each of them respectively, cannot do it all. This is why it is so crucial to make sure that we have the proper financial instruments and tools to foster innovation and innovation that addresses the real concrete challenges of our world.

First and foremost, sustainability, environmental related, but also social–access to education, access to affordable services–can be improved through technology and innovation. So this is why it’s so crucial.

This is actually one of the things I love about my job and this ecosystem: that it requires [you] to not be binary. And it requires [us] to have a bit of open mindedness and cooperative spirit, assuming that, on the one hand, impact investing will not solve it all. ESG will not solve it all. Same as it’s not fair to expect that the welfare state will solve it all. So there’s a huge responsibility of the financial players in general–I think especially the public ones, such as the European Investment Fund–to engage and be active in this segment.

This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.