The potential of impact investing in listed equities

Morningstar Research predicts that the Sustainability Impact label will be used by the smallest number of firms, while Financial Conduct Authority (FCA) research found it was the most positively received by potential investors.

The label is expected to house a range of different fund types and asset classes including investment trusts, private markets and property. The sector we are most passionate about is the power of impact investing in listed equities (stocks and shares) – and their critical role in a transition to a more sustainable future.

What is impact investing?

The past few years have witnessed an explosion of interest in sustainable and responsible investing and integrating environmental, social and governance (ESG) issues into investment. While this enthusiasm has been tempered in recent months, interest remains strong in sustainability investing generally, with a growing interest in impact investing.

In the main, ESG is directed at meeting new compliance (regulatory) requirements or as a tool for managing investment risk. In contrast, impact investing is an investment philosophy that seeks to deliver a positive sustainability impact alongside a positive financial return. Impact sits at the heart of the investment decision and requires active ‘investor contributions’ (in the form of stewardship and engagement) to amplify this positive impact.

We believe that all investments have an impact: some negative and some positive. Impact investing has the dual aim of producing a financial return while evidencing the positive sustainability impact of the investment. This impact is explained through a clear ‘theory of change,’ which connects the investment in the underlying holding with the problem that is being tackled.

As an example, we invest in Smurfit Kappa, which collects, manufactures and sells recycled cardboard. Recycled cardboard is a preferable packaging material in many applications with lower environmental impacts compared to other materials. We measure the company’s positive sustainability impact in tonnes of waste recycled and tonnes of CO2 emissions avoided.

We also engage with their management as part of our ‘stewardship’ approach to further improve their social and environmental impact on topics including: biodiversity impacts, carbon reduction targets, community relations and gender diversity.

The potential of impact investing in listed equities

In order to have big global impacts, you need big global companies, matched with big global markets. As Sir Ronald Cohen put it “There is no other way to cope with the scale and severity of social and environmental issues other than to attract investment capital from the $200 trillion of investable assets in our financial system”.

Investing in listed equities means investing in these publicly traded stocks and shares. By 2019, listed equity and debt accounted for around one-third of impact investments, becoming two of the fastest growing asset classes for purpose-led investors. A benefit of impact investing in listed equity markets is that these markets are available to small and larger investors alike and offer scale, liquidity and enhanced transparency. For example, they can be accessed via tax-efficient vehicles like ISAs.

They are also public companies so are subject to disclosure regulations and governance requirements including access to corporate information. This can help tackle ‘impact washing’.

Without means to allocate purpose-led capital to the largest – public – markets, we are concerned that impact investors will fail to deliver the scale of global solutions our communities and planet require.

The FP WHEB Sustainability Fund

The FP WHEB Sustainability Fund focuses on the opportunities created by the transition to healthy, zero-carbon and sustainable economies.

• Specialist boutique. As a mission-driven, specialist boutique we have a total focus on positive impact, and an ambition to remain at the forefront of the rapidly growing impact investing movement.
• Established pioneers. The WHEB strategy was designed more than 18 years ago, and the team are considered pioneers and thought leaders in impact investing, ESG integration and impact measurement.
• Intentional focus on solutions and positive impact. We focus on finding companies where the impact case is the investment case, aligning our clients’ investments with companies which are enabling and therefore benefiting from the transition to a zero-carbon and more sustainable economy.
• Rigorous approach to ESG integration. Sustainability is ‘built-in’ to our investment strategy as a source of investment return, rather than ‘bolted-on’. How a company addresses ESG risks and opportunities is an integrated part of our investment analysis.

We welcome the FCA’s new SDR regulations and anticipate they will make it easier for investors to align their investments with their values. We will be applying for the Sustainability Impact label for our Fund.

For more information on our Fund:

Visit our fund page:

https://www.whebgroup.com/impact-investment-funds/sustainability-fund-oeic

Read our commentaries and opinion pieces on environmental and social impact themes and wider issues relating to impact investing:

https://www.whebgroup.com/our-thoughts

See how we have been reporting impact since 2014:

https://www.whebgroup.com/reporting-impact-investment

Risk warning: when you invest, your capital is at risk.