A lesson by an INSEAD Impact Investing professor: Can regulators and businesses cooperate to save the planet?

Meet Prof. Singh, INSEAD's expert in Impact Investing

‍

‍Currently serving as a Professor of Strategy and the Paul Dubrule Chaired Professor of Sustainable Development at INSEAD, Prof. Singh's expertise spans in areas such as Sustainability Strategy, Inclusive Business, Innovation, Impact Entrepreneurship, Impact Investing, and Impact Evaluation.

With a doctoral degree in Business Economics (Strategy) from Harvard Business School and a master's degree in Economics from Harvard University, he also holds a BTech from IIT Delhi and a dual MS from Georgia Tech.

‍

In his article "ESG is not impact," Professor Jasjit Singh emphasizes how important it is to combine regulatory frameworks and business investments. According to him, we should systematically incorporate ESG and climate impact considerations to financial decisions in order to seek societal progress. We are very grateful for Prof. Singh's time in responding to Homaio's questions and generously sharing his academic expertise.

‍

Homaio: ESG and impact investing at the center of your academic career. Why?

Prof. Singh: At INSEAD, I am completely focused on studying and teaching about issues at the intersection of business and society, and ESG/Impact Investing represent some of the most critical debates in this space today. So it is natural for me to be involved in this space. The good news is that this is also of increasing interest to students.

‍

H: Why is everyone interested in "ESG investing"? Is it just a trend? An obligation?

JS: Most of ESG investing is driven by a view that, even for achieving solid risk-adjusted financial returns, considering ESG factors is becoming more and more important. However, we should be realistic about what ESG can achieve if completely non-standardized and voluntary: a large fraction of the mainstream investors would not care about societal impact beyond the point till when it is good for their bottom-line.

‍

H: What is needed to make more companies and investors interested in achieving positive societal impact?

JS: The hope is that as stakeholder pressures – such as those from regulators, customers, employees and communities – continue to increase, even purely money-minded companies and financial institutions will have to care more and more about society too.

‍

H: What are the biggest risks when it comes to ESG investing?

JS: The thing we need to look out for is that, to the extent that ESG remains voluntary, it risks degenerating into green-washing/impact-washing. People are also pointing out a systems-level concern that it can crowd out other – and sometimes more effective – kinds of societal action on certain issues that require faster or deeper change.

‍

H: What is the difference between ESG and impact investing? Why does such a difference exist?

JS: Unlike ESG, impact investing pursues more clear impact strategy and impact management towards measurable goals. Impact investing, however, is relatively small compared with ESG investing. The reason is that the non-concessionary segment has limits on how many “win win” opportunities truly exist to hit market returns while making substantial impact (especially if you also require additionality of the investment), while concessionary funding has limits to scaling as it has a component of philanthropy need built in.

‍

H: Can climate investing be entirely voluntary and autonomous from any sorts of regulation?  

JS: It is a myth to think that ESG or impact investing, or indeed any kind of market mechanism, can exist in a vacuum without a regulatory framework that sets rules of the game in the first place. Regulation is in the background. For example, the threat of climate change is leading ESG investors to anticipate, among other things, a rise in carbon prices, and that in turn is nudging them to move faster on climate action (e.g., setting an internal carbon price).

‍

H: You just said that we need some regulatory framework in order to have effective climate investing solutions. But you also say that "Policy solutions are rarely perfect" . Is a combination of those aspects (regulation and free market dynamics) the best solution?

JS: Policy solutions are rarely perfect, indeed. Politics by definition involves compromises to get enough support to pass any regulation or get to any agreement. Real life rarely mimics “first best” from economics textbooks or scientific recommendations (e.g., from IPCC). This is as true at the regional and national level as at the international level (e.g., think of the painfully slow progress being made through the annual COP conferences and resolutions). Policy solutions, just like business solutions, also often have unintended consequences. So we cannot expect that either just business or just governments can fix society’s grand challenges. We need both of them to do their part. There are no magic bullets!

‍

H: Are carbon markets an effective impact investing tool? What is your opinion on the voluntary and the compliance carbon markets?

JS: Carbon markets are indeed part of the overall climate solution as not every organization or sector can quickly reduce its emissions down to acceptable levels. The real issue is that, in a majority of settings today, carbon markets are voluntary, the level of verification is less than ideal, and fundamental issues like additionality, permanence and leakage are often not given adequate consideration. There are in fact many scientific studies showing that carbon offsets that are certified even by prestigious ratings agencies often have a real impact that is much smaller than is claimed. So we need to make a lot more collective progress on this within countries as well as internationally. We need carbon markets based on stricter standards and regulations, and should make sure that voluntary carbon markets have really good verification mechanisms that also cover issues like additionality, permanence and leakage.