One of the defining features of listed equities and publicly owned companies is that their shares trade on an exchange. When investors buy or sell shares through such secondary transactions – does their capital provide much additionality and encourage sustainable business practices? With the massive growth of passive investment strategies in public markets, most commonly in ETFs, is it possible to implement effective impact investing approaches is listed companies?
The answer is complex, however the explosion of ESG, sustainable and impact funds in public markets suggest investors are seeking a change in how their money is invested in this asset class
The growth of this segment of the market has been due to two main reasons, firstly increasing acceptance that social and environmental value creation is not in conflict with financial returns, and it even underpins and drive investment returns in a virtuous circle. Secondly, investors and their advisers are looking for ways to scale impact investing tools and techniques for use in the large public markets and thus allow for impact to be achieved across all asset classed in investment portfolios.
Most importantly to note, historic data shows that investing in a socially responsible way does not necessarily compromise performance:
Source: MSCI, UBS Asset Management, 2015. 5-yr annualised net return.
SRI, ESG and Impact Investing
Constrained investing practices have been in existence for a long time, traditionally driven by religious or moral values. As the market has developed several acronyms have emerged to classify fund strategies. They are listed below ordered from least to greatest impact intention:
ESG investing – the inclusion of environmental, social and governance considerations to complement standard investment analysis. Examples are potential litigation, regulatory or reputational risks, which tend not appear in a fundamental analysis. It is important to note that the inclusion of ESG factors is simply an attempt to improve valuation accuracy, and thus does not preclude investments in certain industry sectors such as tobacco.
Socially responsible investing (SRI) – an active or index strategy which filters investments according to screening criteria set by the asset manager. The screening process can remove, underweight or overweight investments in a portfolio. An traditional example is a public equity fund whose portfolio tracks an index but drops companies with business activity in tobacco, gambling and arms.
Impact investing – builds on the prior two strategies by specifically focusing on companies intentionally creating and measuring impact. For this reason most impact investing public equity funds have a greatly reduced number of holdings (around 50) and typically a longer holding period. This reduced portfolio size helps make it possible for fund managers often seek management engagement to improve impact measurement and reporting practices.
Is it Possible to Create Impact by Investing in Listed Companies?
An occasionally mentioned impact investing criteria is additionality, the ability to demonstrate a measured impact would not have occurred without the investment being made. This criteria has led some to question the validity of impact investing in public markets, since the trading of public equity usually takes place in secondary markets and thus investment capital is not directed to the selected companies. However, investing in public markets provides liquidity, upwards pressure on stock prices, and can provide an opportunity for engagement and lobbying of management. Read more about public equity investment with the following insightful papers:
Listed, or public equity is an important asset class to mobilising capital for impact as it meets the needs of many institutional investors. The investment scale and risk profile of large pension funds for example is not suitable for investments in early-stage private equity. Thus providing these investors with impact investing opportunities is an important part of the puzzle to making use of global capital markets effectively, especially as institutional investors face increasing pressure to include impact in their mandates.
Aegon Asset Management also note that many asset managers are in fact active in fixed income (some more so than equities). Additionally some are active in impact investment without this necessarily leading to impact-themed funds or products.
Difficulties arise with terminology and classification in this segment – what does it take to label a listed equity investment as an impact investment? Different funds with different strategies each incorporate SRI, ESG and impact investing principles to different degrees and as of the time of writing the GIIN only lists 8 as meeting their criteria on their ImpactBase database.
Impact investing job roles in asset management follow the normal industry hierarchy seen at funds. Listed equity/debt fund managers will have teams of analysts, sometimes shared with other funds. Therefore positions on impact funds will be typically be senior roles – the fund manager or on the fund’s direct team. Public company analysis experience is key, as is experience and knowledge of impact management. Timing is key to align with the creation of a new fund, but it is also worth networking with ratings agencies and related organisations if impact in the public markets is your area of interest.
There are many asset managers working in the impact space, and the list below is not intended to be exhaustive. For further research look at industry awards for useful lists of high performing asset managers.
Hermes Investment Management – Impact Opportunities Fund
This fund aims to hold 25-50 companies for five-to-10 years, resulting in very low portfolio turnover. Focusing on future leaders rather than index heavyweights the fund seeks engagements with companies to create a positive feedback loop that strengthens and sustains the changes they are creating. Measurable impact is an essential part of the investment case for each portfolio stock, and the fund team connect companies’ outputs with positive impacts on society and the planet.
WHEB – Sustainability Fund [$260M]
Focused on nine sustainable investment themes; five environmental (cleaner energy, environmental services, resource efficiency, sustainable transport, and water management), and four social themes; (education, health, safety, and well-being). 50-70 stocks are selected through a ‘bottom-up’ stock-by-stock fundamental and rigorous research process. The fund team develops long-term relationships with company managements to promote the best environmental, social and economic outcomes.
UBS – Global Impact Equity Fund
Investments are screened from the 2500 global equities in the MSCI All Country World Index according to three criteria to produce a portfolio of 40-80 stocks. The fund’s Sustainable Investors team engages with all portfolio holdings to provide education on how we measure impact, encouraging the company to test UBS’ metrics and suggest improvements.
Impax – Environmental Markets Fund [$680M]
A portfolio of 55-65 investments in “pure-play” small and mid cap companies which have >50% of their underlying revenue generated by sales of environmental products or services in the energy efficiency, renewable energy, water, waste and sustainable food and agriculture markets.
Triodos Investment Management – Sustainable Pioneer Fund [€260M]
A concentrated portfolio of small- and mid-cap companies pioneering the transition to a sustainable society. Companies are selected for their contribution to seven sustainable transition themes. Through integrated financial and sustainability analysis the fund identifies the drivers of a company’s long-term value creation and assesses the impact of ESG materiality on these drivers. Additionally, companies must comply with Triodos minimum standards.
Wellington Management – Global Impact Fund [$170M]
Identifies companies based on three primary impact categories: life essentials, human empowerment, and the environment; and within these categories across one or a combination of Impact Themes. The Fund is expected to have a natural bias towards small to mid-capitalisation companies that are experiencing strong growth.
NN Investment Partners – Global Equity Impact Opportunities [€320M]
An in-house database specifically designed for Impact investing identifies 35-60 stocks that have material exposure to 3 main themes: Diminish Stress on Ecosystems, Health & well-being and Fulfilment of lives. Qualifying impact stocks undergo a rigorous assessment according to their underlying financials and ESG performance. The portfolio managers look for those stocks that rank highly in terms of Quality, Growth, Valuation and ESG momentum.
Standard Life – Global Impact Equity Fund
This fund has a high-conviction portfolio of 35-60 stocks. To ensure companies are making a genuine impact through the products they make or the services they provide, each must intentionally direct its resources towards making a positive environmental or social contribution, must actively implement this strategy in its operations and the impact must be measurable.
Jupiter – Ecology Fund [$580M]
The fund team looks for global companies with strong management teams, sound balance sheets and defensible market positions which, in time, convert a proportion of their profits into cash. With the focus on companies that provide solutions to global environmental and social problems and a deep, long-term impact across three key areas: infrastructure, resource efficiency and demographics.
Sycomore – Various Funds
An investment approach driven by a proprietary fundamental analysis model that seeks to identify sustainable growth levers and covers four strategies: Sustainable Equities, Thematic Equities, Flexible Strategies and Credit Crossover SRI.
To supplement asset manager’s screening, ratings agencies provide research to rate listed companies sustainability. In addition ratings exist for funds, to help wealth managers and retail investors select products to meet their risk/return/impact criteria.
The leading independent global provider of ESG and corporate governance research and ratings to investors with company, portfolio and index level services.
A platform bringing together thousands of analysts that are not selected on their degrees or professional background, but rather on the quality, relevance and objectivity of the analyses they publish. Impaakt looks at a firm’s entire impact in the most exhaustive way, analysing how their operations, their products, their innovations and even their ideas profoundly change our society and our planet.
MSCI ESG Ratings
ESG ratings of 7,000 companies and more than 650,000 equity and fixed income securities globally, used by 46 of the top 50 asset managers and over 1,200 investors worldwide.
Morningstar Sustainability Rating
Allows fund investors to evaluate how well the companies in a fund’s portfolio are managing ESG factors relevant to their industries.
Provides a star based rating for over 200 ethical and sustainable funds, looking at each and every holding to determine the actual impact of a portfolio and to identify any ethical controversies. See the 2018 Good Investment Review.
The world’s largest sustainability business intelligence database with ratings and rankings of 18,530 companies from 132 countries, driven by 548 industry-leading CSR/ESG data sources.
Analyses the sustainability performance of over 3,400 listed companies every year on the basis of environmental, social and economic criteria.