Impact investing aims to be a win-win concept – investors enjoy potentially attractive financial returns while simultaneously having a positive effect on society and the environment.
The roots of impact investing lie in venture capital and private equity but as this investment approach moves further into the mainstream, there has been considerable debate around how impact can be truly achieved via publicly listed equities and corporate bonds. In addition, there remains a lack of industry-agreed impact investing standards in listed assets. Given this backdrop, we address the primary issues we believe investors need to consider when it comes to impact.
Is there a trade-off between impact and financial returns?
We believe there can be a trade-off when companies implement strategies with a short-term mindset, by looking for temporary uplift in financial returns or societal impact. But when an intention to create positive impact is genuine and embedded into a company’s offerings and practices, we believe this promotes better corporate health and can also potentially lead to improved long-term returns for investors.
Firms will give themselves a better chance at being amongst the long-term impact winners by focusing on the UN 2015 Sustainable Development Goals (SDGs) and addressing the unmet needs of society, and pioneering accessibility for their products and services – here they can establish significant profitability moats. By promoting solutions and acting responsibly, they are creating important loyalties among key stakeholders and are better preparing their business for a resource-constrained future.
How should impact investors deal with poor and inconsistent disclosures?
A lot of discussion around impact investment focuses on the availability – or lack thereof – of backward-looking performance measures. But good performance disclosure alone does not in itself resolve global issues around climate change, or water scarcity or lack of healthcare provision.
Due to some local market norms, many companies are not leaders in disclosure. Sometimes these are due to such reasons as commercially sensitive data, evolving internal methodologies in measurement or the disclosure burden for smaller companies. We do not believe that disclosure alone should be an impediment to investing into firms which can otherwise be assessed to be impact leaders. We would rather own companies which we judge to generate the best societal outcomes than invest in those with the best disclosure of standardised impact KPIs.
Nevertheless, we believe that impact investors need to be accountable to their clients and impact leaders to demonstrate a clear willingness to implement the monitoring and disclosure of relevant impact-related performance data, with an understanding of its links to the SDGs.
What role should third-party data providers play?
Third-party research companies and index providers can offer a range of valuable impact data sets which can be an insightful tool for asset managers. While the quality needs to improve, we’re confident this will happen over time, and methodologies used by these businesses will become ever-more sophisticated. However, for the time being, we would question the merits of overly relying on such data sets or using them in isolation. The very subjective nature of what constitutes an impact company should logically impair the credibility of a tool that looks to systemise impact assessments across a broad range of thousands of companies. This issue is magnified, too, when you consider the lack of standardised impact disclosures across many companies.
Instead managers should dig deeper and leverage what information they can on company revenue compositions, as well as ESG scores, assessments and many other factors.