The world faces numerous challenges, from climate change and poverty, to inequality and pollution. As asset managers, we believe we can play a vital role in helping to address these issues. One way to do so is through equity impact investing.
This involves investing in listed companies or organisations that are attractive from a financial position, but whose activities, technologies or products are specifically designed to address the planet’s long-term problems.
Examples of such companies include Safaricom, which promotes financial inclusion in Kenya through its mobile money platform, M-PESA; Clinigen Group, which is committed to providing ethical access to medicine globally; and Costa Group, which is committed to advancing sustainable agriculture practices
The success of these and others companies can create substantial value for long-term investors, both financially and socially.
Asset managers can harness the power of these opportunities by purchasing company shares and creating an equity impact fund. Such funds can have specific goals, such as concentrating on job creation and employee wellbeing, or can be more broad-based, addressing a range of social and environmental issues.
A measure of success
While this is an exciting area of the market, there are challenges. Chief among them is how to ascertain whether a company is having a genuine impact or if it is just piggy-backing on a burgeoning investment trend.
In our view, impact investing must have two characteristics: first, the company must have the strategic intention to deliver a positive impact (i.e. its business model must be designed to achieve a specific positive societal and/or environmental goal); and second, this impact must be measurable.
On the latter point, while measuring financial returns is fairly straightforward, the science of quantifying positive environmental or social impact is more difficult.
United in impact
One universal framework for helping to identify the world’s challenges and to consider a corporate’s contribution to progress against these challenges is the United Nation’s Sustainable Development Goals (SDGs).
These are a set of 17 global goals aimed at tackling climate change, rising inequalities, and unsustainable production and consumption.
The UN has identified 232 indicators to measure progress against the goals, and asset managers can use these indicators to analyse the positive outcomes that companies are supporting.
For example, a business’s contribution to sustainable energy can be gauged against factors such as the proportion of its customers that now have access to clean energy or the amount the company invests in developing clean energy.
For companies, the UN SDGs can provide a framework to identify new markets and direct their efforts to the areas of greatest need. We believe that supporting the SDGs creates tangible opportunities for companies to contribute positively to society and the environment, while simultaneously enhancing the long-term financial value of the business.
It’s all in the report
Aside from intention and measurement, it is also important that companies report accurately and meaningfully on their activities. This can help demonstrate transparency and accountability, and should help build investor confidence in impact investing. It also allows investors to make comparisons between companies and robustly analyse the businesses in which they invest.
A bright future
The outlook for mainstream equity impact investing is bright, as investors increasingly look for financially attractive investment solutions that make a difference to the world. Indeed, according to JP Morgan, impact investing could reach $1 trillion by 2020.
In addition, as more capital and expertise enter the market, we will no doubt see a wider range of investment solutions emerge that will seek to address the numerous challenges highlighted by the SDGs.
Importantly, impact funds will slowly build performance track records during this time, which will help demonstrate the benefits of these type of investment solutions and cement their place in the vanguard of values-based investing.
The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Past performance is not a guide to the future.
Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.