Interim Investing and ESG: The Evolution of Investment Strategies in Projects

In recent years, Environmental, Social, and Governance (ESG) criteria have rapidly moved from the fringes to the forefront of global investment strategies, profoundly influencing how projects are evaluated, financed, and implemented. This seismic shift reflects a broader acknowledgment within the investment community of the significant impact that sustainable practices have on long-term profitability and risk management. Major financial institutions and investment firms, such as BlackRock, Vanguard, and State Street, have integrated ESG factors into their investment analysis, demonstrating a commitment to these values by managing hundreds of billions of dollars in ESG-focused assets.

This shift has been catalyzed by regulatory developments aimed at standardizing ESG reporting and accountability. Jurisdictions like the European Union have led the charge with comprehensive regulations such as the EU Taxonomy for Sustainable Activities and the Sustainable Finance Disclosure Regulation (SFDR), which mandate detailed disclosures enhancing transparency. Similarly, the U.S. Securities and Exchange Commission (SEC) has proposed amendments to its rules to include enhanced climate-related disclosures for public companies, reflecting a global trend towards more stringent regulatory oversight of ESG practices. These frameworks aim to prevent ‘greenwashing’—the practice of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound—and ensure that ESG claims are backed by tangible actions.

I want to dive into how ESG has evolved from optional to essential, outlines the distinct but complementary nature of ESG and sustainability, introduces the concept of Interim Investing, and highlights why organizations that embed sustainability into their project delivery are likely to attract discerning interim investors.

The Rise and Regulation of ESG

While ESG has been around longer, the last five years, it has really transitioned from a niche interest to a mainstream concern, influencing how billions of dollars are invested globally. Initially driven by a desire to mitigate risks and enhance reputations, the focus on ESG factors has led to a surge in responsible investing. This trend is evident in the increase of signatories to the United Nations Principles for Responsible Investment (UNPRI), which grew from 1,200 in 2010 to over 3,800 in 2020, representing over $103 trillion in assets under management.

However, the rapid adoption of ESG criteria has led to a need for clearer, more consistent application and reporting standards. This has resulted in increasing regulation worldwide. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) and the U.S. Securities and Exchange Commission’s push for enhanced climate disclosures underpin a global move towards more stringent ESG reporting requirements, ensuring that ESG claims are substantiated with concrete actions and verifiable data.

ESG vs. Sustainability: A Distinct Difference

While often used interchangeably, ESG criteria and sustainability are distinct concepts. ESG refers to specific metrics that investors use to evaluate corporate behavior and potential financial risks and returns associated with environmental, social, and governance practices. In contrast, sustainability is broader and encompasses enduring practices that ensure long-term environmental health, social equity, and economic viability.

The distinction is crucial in understanding investment impact. ESG operates on an “outside-in” perspective, where external stakeholders assess a company’s impact on the world. Conversely, sustainability is an “inside-out” approach focusing on how internal practices sustain a business over the long term without depleting the natural or social resources it relies on.

This differentiation aligns with the principles of dual materiality as outlined in GPM’s P5 Standard for Sustainability in Project Management. The P5 Standard emphasizes that sustainability initiatives should address both the external impacts of business operations on the environment and society (outside-in) and the internal dependencies and risks to the business from environmental and social issues (inside-out). This comprehensive view ensures that sustainability practices are focused not only on mitigating negative impacts but also on leveraging opportunities for positive engagement and development. By incorporating this dual materiality perspective, businesses can create a more robust and integrated approach to sustainability that extends beyond the scope of traditional ESG metrics. See the diagram below, which shows the relational aspect of projects and operations and the links to both reporting and disclosures, illustrating how they differ in scope and purpose.

 

Figure 1. Dual Materiality for Sustainability Reporting and ESG Disclosures from the GPM P5 Standard v. 3.0

Interim Investing: What ESG will become

Interim investing represents a nuanced and emerging investment approach that fills the gaps left by traditional ESG metrics. It shifts the focus from mere compliance with sustainability standards to a deeper, more holistic consideration of how projects evolve and transition toward sustainability. This approach is gaining ground as investors increasingly seek not only to understand the immediate impacts of their investments but also how these investments drive broader, systemic changes over time.

The concept of Interim Investing originated from the realization that traditional investment approaches, including standard ESG criteria, often overlook the processes and intermediate stages that lead to sustainable outcomes. In traditional frameworks, the emphasis tends to be on the end results or the static features of a project at a specific time. However, Interim Investing recognizes that the journey towards sustainability—how a project progresses, adapts, and impacts its environment and community through its lifecycle—is equally important.

This approach stems from a need to address the complexities involved in transitioning industries and societies to more sustainable practices. It acknowledges that impactful investments are those that facilitate change, manage transitional risks, and ensure resilience and adaptability in the face of evolving environmental and societal needs.

Gaining Ground

Interim Investing is gaining traction among forward-thinking investors, particularly those involved in large-scale, long-term projects such as infrastructure, urban development, and renewable energy. These sectors, characterized by their significant environmental and social impacts, require a dynamic investment approach that can adapt to and anticipate changes over extensive periods.

Investors are increasingly aware of the limitations of static ESG metrics, which may not adequately capture the ongoing changes and developments in a project. As such, they are adopting Interim Investing strategies to better manage the complexities and uncertainties inherent in these large-scale projects. This approach ensures that investments are not only viable and sustainable in the immediate term but are also designed to support continuous improvement and adaptation over time, aligning with global sustainability goals.

Interim Investing also aligns with the principles of “impact investing,” which focuses on generating social or environmental benefits alongside financial returns. By considering the interim stages of project development, investors can more effectively measure and manage the impact of their investments, leading to more informed and responsible investment decisions.

As the world continues to grapple with urgent sustainability challenges, the adoption of Interim Investing is likely to increase, driven by the demand for more accountable, transparent, and effective approaches to financing sustainable development projects.

Example: Infrastructure Development through an ESG and Interim Investing Lens

Picture a major urban infrastructure project, such as the development of a green public transport system. From an ESG perspective, the project might be evaluated on metrics like greenhouse gas emissions reduction, labor practices, and governance structures. Interim investing, however, would also consider how the project transitions the urban area towards less car reliance, the interim solutions for traffic displacement, and the project’s role in a broader sustainable urban development plan.

The Future of Investing in Sustainable Projects

Organizations that seamlessly integrate sustainability into both their project delivery and outcomes are increasingly favored by interim investors. These investors are looking for more than just surface-level ESG compliance; they seek deep, genuine practices that promise sustainability and resilience over the long haul. As regulations tighten and stakeholder expectations rise, the ability to demonstrate a real commitment to sustainable development can significantly enhance an organization’s ability to attract investment.

And as we move forward, the evolution of ESG into more comprehensive investing frameworks like Interim Investing will likely reshape the landscape of project financing. Businesses that can adapt to these changes, embedding true sustainability into their core operations, will not only thrive financially but will also contribute to a more sustainable and equitable global community.

The Implications to the Project Profession

The rise of Interim Investing will significantly influence several aspects of project management and development, including the crafting of project briefs, the structuring of project finance engineering, and the methodologies applied in project delivery.

Here’s how each area will be impacted:

  1. Project Briefs

  • Enhanced Focus on Sustainability Milestones: Project briefs will increasingly need to outline not just the final objectives but also interim sustainability impacts and milestones. These milestones will serve as checkpoints to assess the ongoing alignment of the project and its impact on the environment and society.
  • Increased Transparency and Accountability: There will be a higher demand for transparency in project briefs regarding the sustainability impacts. This means clearly documenting the expected social and environmental benefits at each phase of the project and detailing the strategies to achieve these outcomes. For those who use the GPM P5 tools, this is good news as it is just business as usual…
  • Adaptability and Flexibility: Project briefs must be designed to be adaptable to accommodate changes and innovations that can lead to better sustainability outcomes. This flexibility will be crucial to respond to evolving regulations, stakeholder expectations, and technological advancements.
  1. Project Finance Engineering

  • Risk Assessment and Management: Interim Investing requires a nuanced approach to risk management that considers both traditional financial risks and those associated with environmental and social factors. Financial models will need to integrate ESG risk assessments that account for potential regulatory changes, market shifts towards sustainability, and community responses.
  • Performance-Based Funding: Financing structures may evolve to include performance-based elements that link funding to the achievement of interim sustainability targets. This could mean staged financing releases based on achieving specific environmental or social milestones.
  • Innovative Financial Instruments: There might be an increase in the use of green bonds, sustainability-linked loans, carbon credits, and other financial instruments designed to fund projects that have clear, quantifiable sustainability benefits. These instruments often offer favorable terms as incentives for achieving sustainability objectives.
  1. Project Delivery Methods

  • Iterative and Sustainable Methodologies: Project delivery methods will likely shift towards more iterative and sustainable frameworks. These methodologies allow for continual assessment and adaptation, which is ideal for managing the complex, dynamic challenges associated with sustainable project outcomes. For this very reason, we have developed our tools to plug in to any delivery approach.
  • Integration of Sustainability Departments: Delivery methods may increasingly involve integrated teams that include sustainability experts alongside traditional project roles. This integration ensures that sustainability considerations are embedded in every decision-making process and not treated as an afterthought. Of course, a PMO can be a large asset here if they are armed with a sustainability focused governance model.
  • Enhanced Stakeholder Engagement: Delivery methods will need to incorporate extensive stakeholder engagement processes to ensure that all voices are heard and that projects remain aligned with community needs and expectations. This is particularly important for maintaining social license to operate and for the successful adoption of project outputs.

Don’t take my word for it.

These firms represent a trend among financial institutions that recognize the importance of sustainability as a critical component of investment analysis and decision-making, aligning well with the principles of Interim Investing by focusing on the sustainability journey of their investments.

  1. BlackRock:
    • As the world’s largest asset manager, BlackRock has increasingly emphasized sustainable investment strategies. The firm has committed to expanding its sustainable asset offerings and integrating climate considerations into all investment decisions, reflecting an interim investing approach by considering long-term environmental and social impacts.
  2. Goldman Sachs:
    • Goldman Sachs has been proactive in funding sustainable and transitional projects, especially through its sustainable finance group. The firm aims to invest $750 billion into climate transition and inclusive growth finance by 2030, focusing on areas that support interim steps towards sustainability, such as renewable energy, sustainable transport, and ecosystem services.
  3. Bain Capital:
    • Bain Capital’s Double Impact Fund targets investments that meet social and environmental objectives along with financial returns. They focus on companies that can scale positive impacts on societal challenges, indicating an approach that values continuous improvement and long-term sustainable outcomes.
  4. Generation Investment Management:
    • Co-founded by Al Gore, Generation Investment Management is dedicated to long-term investing, integrated sustainability research, and client alignment, which are key components of an interim investing approach. They invest in sustainable businesses that are geared towards enduring economic, social, and environmental returns.
  • Impax Asset Management:
    • Impax specializes in opportunities arising from the transition to a more sustainable global economy. They focus on the environmental markets and resource efficiency sectors, where the potential for interim steps towards larger sustainability goals is significant.

As Interim Investing continues to gain traction, it will necessitate profound changes in how projects are conceived, financed, and executed. The emphasis on the interim steps towards sustainability not only changes the scope of project evaluation but also enhances the overall approach to achieving long-term sustainable development. This shift promises to make projects more responsive to the immediate needs of the environment and society while aligning with global sustainability targets.

 

 

Dr. Joel Carboni

Dr. Joel Carboni is a highly respected expert in sustainable project management. He is a graduate of Ball State University and holds a Ph.D. in Sustainable Development and Environment. He has over 25 years of experience in project management, including government, finance, consulting, manufacturing, and education. He is a frequent speaker at conferences and events related to project management and sustainability and has worked in more than 50 countries. In addition to serving as President Emeritus of the International Project Management Association (IPMA) in the United States and being a member of the Global advisory board, Dr. Carboni is also the founder of GPM (Green Project Management) and a visiting professor at Skema Business School. He is also the GPM representative to the United Nations Global Compact, where he was a founding signatory of the Business for Peace Initiative and the Anti-Corruption call to action and a contributor to the development of the UN 2030 Agenda for Sustainable Development (SDGs). Dr. Carboni is the creator of the PRiSM™ project delivery methodology and the P5 Standard for Sustainability in Project Management and has written training programs on Green and Sustainable Project Management that are offered in more than 145 countries through professional training providers, business associations, and universities. He is the lead author of the book "Sustainable Project Management."

One thought to “Interim Investing and ESG: The Evolution of Investment Strategies in Projects”

  1. Insightful article and good call out on next step for ESG and the value P5/PRiSM can bring into it.

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