There is a spectrum of approaches to responsible investing, from excluding companies that fail certain criteria, through full integration of environmental, social and governance (ESG) factors in the investment process, and up to strategies that target specific sustainability-oriented themes such as renewable energy.
If non-financial goals are as important to you as financial returns, you can explicitly target investments that also deliver positive change for society or the environment. This is generally referred to as impact investing.
Pragmatism, not idealism
Like any approach to responsible investing, investing for impact should not be confused with charity. The objectives of impact investing are financial, as well as to deliver shared returns for society or the environment.
In our view, there can be compelling investment opportunities where companies deliver a positive impact on society. Many stand to profit from tailwinds where their businesses align with sustainability trends, such as growing demand for responsibly sourced goods.
We believe it can therefore be a pragmatic choice, not an idealistic one, to help address environmental and social challenges by investing in companies that can demonstrate impact. This could be through pioneering products or services, by driving sustainability improvements in their sector or even by providing other companies with the tools to deliver impact.
It is of course harder to measure environmental or societal returns than financial returns, but this is not to say we can’t. As with any metric of performance, we need a robust framework for gauging impact.
The UN Sustainable Development Goals, which set targets for addressing the world’s most pressing sustainability issues, can help investors in this respect. They can only take us so far – impact investors have to apply rigour in their own approach and analysis – but the Goals articulate common principles for an economic model that recognises the value of a clean environment and of an equitable and healthy global society.
The positive impact of an investment can, generally speaking, be assessed by analysing how a company performs against any of these 17 Goals. For instance, a healthcare company could contribute towards Goal 3 – “ensuring healthy lives and promoting wellbeing for all” – if its medicines alleviate or prevent illness. The company’s positive impact in this sense would be defined by its reach and the effectiveness of its treatments.
Impact investing is to some extent defined by the ability to measure an investment’s environmental or societal impact, but lack of disclosure by companies can hamper these efforts. This is a developing area and one of the roles investors can play is to encourage investee companies towards greater transparency in disclosing their impacts on society, both positive and negative.
Investing for impact is nothing new. Many institutional investors, like pension funds, already target non-financial goals with some of the investments they make to meet their liabilities. It is becoming easier for individual investors to follow suit.
Embracing companies’ relationship with society and the environment creates a new strategic lens through which investors can evaluate the prospects – and ultimately the success – of investments. By looking at the bigger picture, beyond traditional metrics of success, we believe investors can aim higher.
Ben Constable-Maxwell is Head of sustainable and impact investing. John William Olsen is a Fund Manager at M&G.
We are not able to give any financial advice. The views expressed in this document should not be taken as a recommendation, advice or forecast.
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