6 min read 16 Mar 22
Summary: While impact investing was previously reserved for institutional or high net worth investors, it has now become freely accessible to everyday investors through impact funds investing in publicly listed equities. Here, we look at what sets impact investing apart from other responsible investment approaches, and find out how impact investors can measure the positive impact of their investments.
Impact investing has become increasingly prominent in the past couple of years. The COVID-19 pandemic and the climate emergency have brought many of the social and environmental challenges our world is facing into sharp focus. Greater recognition of the urgent need to address these challenges has led to growing appetite for investments that help to combat environmental issues and improve social outcomes.
Impact investing explicitly focuses on investments that seek to provide solutions to many of the world’s social and environmental problems. It aims to deliver positive societal impact, as well as a financial return.
The value of the 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.
One of the cornerstones of impact investing is intentionality. Companies must intentionally set out to make a positive impact, rather than it being an inadvertent by-product of their activities. Investors will examine the company’s mission statement, strategy, internal culture and day-to-day activities, to ensure that these align with the particular goal or issue.
The impact also needs to be material. Investors will examine how much of the business’s activities and revenues are aligned to the impact. Furthermore, they will consider whether there are any negative impacts that offset the positives.
Impact investors will also look at additionality. In other words, how would the world be different if the company didn’t exist or wasn’t adequately funded? Would another company step into its place, or would society be worse off?
Given the focus on delivering positive outcomes and solutions, it’s also important for investors to be able to measure a company’s impact. This isn’t an exact science, and there are a number of approaches available. When it comes to investment funds, some investors attempt to distil the impact that can be achieved with every £1,000 invested in the fund. In our opinion, this approach can result in oversimplification or “guesstimation”.
In the M&G Better Health Solutions Fund, we believe it’s more helpful to focus on the individual impact made by each underlying company. To achieve this, we first assess how its activities align to the most relevant of the United Nations Sustainable Development Goals (SDGs)*. The SDGs are a collection of 17 interconnected goals that collectively aim to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. We can then establish key impact indicators (KIIs), helping us to assess and quantify their contribution to the goal.
Companies are also classified as pioneers, enablers or leaders. Leaders are companies which spearhead sustainability in their industries, enablers provide the tools for others to deliver positive social or environmental impact, and pioneers offer products or services which have a transformational effect on society or the environment. See below for three examples from the M&G Better Health Solutions Fund.
A world leader in diabetes treatment supplying 50% of the world’s insulin and spearheading the obesity treatment market.
Impact: In 2020 it provided treatments to around 30 million patients, of which 5 million were treated at a cost of less than US$4 per vial. We use the number of patients reached as our KII.
A specialty cleaning chemicals company which enables its customers to manage and monitor hygiene and sanitation levels in 3+ million locations, thereby reducing the prevalence of infections.
Impact: In 2020 it helped to clean 15 million patient rooms in hospitals and sterilise 3.5 billion pieces of medical surgical equipment. We use an alternative reach metric as our KII.
Pioneering research to discover, develop and commercialise differentiated medicines for underserved diseases.
Impact: In 2020 it had 24 therapeutic products and candidates, of which 13 are in clinical stages. This is an interesting case study. As drug trials progress, we will shift the KII from products in the pipeline to number of patients reached.
As with all investment strategies, impact investing is an ongoing process. Alongside the usual tracking of company performance and other financials, impact investors will also engage with investee companies regularly.
This helps investors to keep tabs on any changes at the company. A significant change to the company’s strategic direction, its products and services, or even its personnel could mean that it is no longer considered impactful, and should be sold.
Regular engagement also provides the opportunity to review the company’s progress against the KIIs, and discuss any shortcomings or outperformance. There may also be scope to encourage positive change at the company, perhaps through better disclosure of data, or new company policies.
*While we support the UN SDGs, please note that we are not affiliated with and our funds are not endorsed by the UN.
The value and income from the 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 the fund will achieve its objective and you may get back less than you originally invested.
The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments.
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the fund in the best interest of all investors.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund.
Operational risks arising from errors in transactions, valuation, accounting, and financial reporting, among other things, may also affect the value of your investments
Further details of the risks that apply to the fund can be found in the fund's Prospectus.
The views expressed in this document should not be taken as a recommendation, advice or forecast
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
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.