Investing for good: How to target 'real' impact in equities

07/09/2020

A quick Google search for “impact investing” reveals more than 300 million results. Interest in this previously niche part of the investment universe is growing fast, reflecting a desire by investors to help address the world’s major social and environmental challenges. The current coronavirus pandemic, while understandably dominating the world’s thoughts, is just one of a long list of such challenges – and there are an increasing number of options for those looking to invest for purpose as well as profit.

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The proliferation of products, however, does present a problem. With so much choice, how can you pick the right one for you? Before this, there is another challenge to overcome. How can you differentiate genuine impact funds from those that are simply masquerading?

When you’re looking to pursue real impact with an investment, there are a few key qualities that you can look for, in my view.

Look at intentions

There are worse places to start than looking at a fund’s objectives. A bona fide impact fund should have its non-financial goals hard-coded into its DNA. Impact funds should by design seek to address the world’s major social and environmental challenges. Rather than being an afterthought, or a secondary consideration, impact-related objectives should at least be on a par with financial goals.

This focus on achieving impact should of course then be reflected in what the fund invests in. When it comes to approaches that invest in listed company shares, the impact for fund investors will largely be a function of the impact delivered by companies in the portfolio.

To pick impactful stocks, fund managers need to gauge the extent to which a company’s purpose is genuinely focused on addressing key societal and environmental issues. Its impact must be intentional, not accidental, and should be reflected in deeds as well as words.

Consider the process

Like any investment strategy, there should be a robust and repeatable framework to consistently evaluate the case for potential investments. When investing in equities for impact, while intention sets the agenda, design and process are the functional tools that actually enable the delivery of the impact.

Importantly, it is always about more than simply excluding certain sectors that cause harm, like tobacco or weapons, or companies whose practices rate poorly on non-financial measures, like pollution or corruption. Such “screening” is useful, but it is only a first step.

Impact investors need to consider how most effectively to deliver the desired impact. It helps to focus first on the challenge at hand and then invest in the solutions. The solution can be assessed by clearly identifying and measuring the positive impact that a company generates. One way is to map impact against the United Nations Sustainable Development Goals (SDGs). These are a universally recognised articulation of the most pressing challenges facing people and the planet, from addressing poverty to combatting climate change.

We can map a company’s activities to a primary Goal, as well as any relevant secondary Goals, and quantify their contribution towards achieving them. I believe we can look not only at the progress companies make against the SDGs through their own products and services, but also at how they enable other companies to deliver a positive impact.

It requires a lot of extra work; but by combining this impact investment case with the financial investment case, fund managers can pick companies that have the potential to deliver profitable growth alongside positive impact. We believe it is a powerful combination.

Focus on outcomes

Measuring the impact of your investments is a central tenet of impact investing. I believe investors should expect impact fund managers to evaluate and report the impact that is being delivered – and also articulate what they themselves are doing to drive that impact forward.

Measuring impact from investing in equities isn’t an exact science, however, and there are a number of approaches. Some attempt to distil the impact you can have – litres of water saved, for instance, or even lives – with every £10,000 invested in a fund. I think there is a danger here of oversimplification and overclaiming. Unless you are investing to target one specific impact goal, such as cutting carbon emissions, we question the validity of aggregating multiple companies’ impacts at portfolio level, and then allotting them to a specific amount invested. While admirable as a strategy for communicating impact, to do so tends to be overly reliant on assumptions.

I believe it’s more accurate to focus on each given company’s impact, assessing how it is performing against the relevant sustainability goal. By establishing key performance indicators that are pertinent to that company’s delivery of an impact outcome, we can assess how the business is making a positive contribution to the SDG and use our investment to push for progress over time. We believe that companies with a clear and impactful purpose are more likely to remain dedicated to these goals over the long term.

However fund managers measure impact, transparency with our investors is all-important, and never more needed than in times like these. By sharing what we see as impact, by continuing to develop our tools for measuring and managing it, and importantly by flagging when it falls short, we can shine a light on how investors can deliver “real” impact where it is most needed.

The views expressed here should not be taken as a recommendation, advice or forecast.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.