Bracing for impact

5 min read 18 Nov 22

A hot new trend in sustainable investing is unpacked by an expert

What is impact investing, and what sets it apart from mainstream investment approaches? Most importantly, what do advisers need to look for when approaching this space? M&G’s John William Olsen, who runs the firm’s Positive Impact and Climate Solutions strategies, gives us the lowdown.

What are the key elements investors need to consider when looking for funds focused on impact investing?

Impact investing is a relatively new discipline in the listed equity space. We started the strategy in 2018, which was when the Global Impact Investing Network – the network behind impact investing – expanded their definitions to cover listed equities. We were among the first managers to begin using the strategy. But it’s still a fairly small field, and the reason is that it’s really hard work: it’s very different to running a regular global equity fund, in the sense that it shapes your benchmark and your universe in a very different way. All the work that goes into fundamental research has to be redoubled on the impact side, and there’s a lot of engagement involved. So if a fund manager is saying ‘we hired two people and they’re going to produce an impact fund’, then it’s not being done in the right way.

How do you assess companies for inclusion in your impact portfolios?

When we look at companies we have four main areas that we consider. We look for materiality (the impact needs be a material part of what the company does). We look for intentionality (this is very important because it’s about whether or not the company is set up with a purpose – Amazon might fit in a standard sustainability fund because of its cloud computing capability, but from an impact standpoint, this isn’t part of the intentionality of the business). And we look for additionality – we ask whether a company is actually contributing towards the specific issue we are looking to solve. For example, within healthcare, a company that produces generic painkillers might seem to fit on a thematic basis or on an SDG level, but from an impact point of view, it would rank very low because of the low additionality.

How can advisers see the impact that’s being made?

This is our fourth area of assessment: measurability. It’s an intrinsic part of what we do. Impact investing elevates the sustainability objective to be side-by-side with the financial objective, so the onus is also on us to report on progress towards that target. There are different ways to approach this, but our method is to set out KPIs or sustainability indicators for each of the companies we invest in. Then we say, ‘this is the exact impact of this company and this is the impact that we want them to improve on over time’. So we set out several KPIs that we follow over time, to measure the impact of that company. This is set out in an annual report that often runs to around 50 or 60 pages and explains the impact of companies we hold.

Of course, the different areas of impact investing require different KPIs. When you look at CO2 it’s relatively straightforward to measure savings versus footprint to give a net impact. On the social side, the impact is different, and depends on what kinds of social impact a company has. It could be bringing people out of poverty in terms of social inclusion, it could be curing health issues, it could be providing better work or education. We have defined KPIs in each of those areas. We use the materiality, intentionality and additionality framework to help us define them, and we focus on specifics. For example, within healthcare, it could be something like access to medicine: if the company is reaching underserved groups with affordable medicine, it would make them rank higher due to the additionality.

As well as the positive impact you also aim to generate returns: why are the areas you focus on positioned to generate growth going forward?

Of course, impact investing covers different areas but let’s look at the environmental space. Here, we’re focused on companies that help the world get closer to net zero emissions. That includes reducing pollution, reducing waste via a circular economy, or delivering other kinds of solutions. These companies are almost certain to benefit from a trend that is going to go on for the next couple of decades. We believe that the focus from governments, from industry, and from consumers towards sustainability will continue, and we think that solution providers are probably the best positioned to benefit from that long-term tailwind.

But that doesn’t mean every solution provider will benefit?

Certainly not, that’s where we have to do our job as investors, which involves weeding out the companies within those areas that have good business models. And here, the intentionality factor brings a dual benefit. A company that has been set up with intention will typically have a direct link between that purpose and the way the company makes money. So if we can find a company with purpose that can compound on financials, then they will be able to put that money back into growing the business, and therefore also compound the impact over time. So it makes perfect sense for us to focus on that strong business model. And this is again why the discipline of impact investing is different from mainstream investing, where, for example, a manager might look at dividend stocks purely because they give money back to investors. We want our companies to keep investing in their business and creating more impact.

What sets M&G apart from other investors in the impact space?

As a company, M&G has always been innovative in coming up with new solutions for clients. We weren’t the first movers in basic ESG investing, but we have a long history of engagement with companies, with recovery funds and other strategies. So we have that background of going in and engaging with companies. On top of that we’ve been able to come up with new products and strategies that match the interests of our clients. We were among the first listed equity impact funds out there, and we were the first asset manager last year to put the ‘Paris Aligned’ label on some of our funds. I believe that we innovate with integrity, and in a way that makes sense not only from an investment perspective, but also in a way that makes sense for our clients.

The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

By John William Olsen

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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