The impact investing universe is growing rapidly. John William Olsen explains where it came from—and where it is going.
Historically the preserve of high net worth and institutional investors, the emergence of listed impact equity funds has opened up the space to members of the public who want to make a difference with their money.
Another driver of growth has been the fact that impact strategies are more tangible and easier to understand than environmental, social and governance investing. The Global Impact Investing Network (GIIN) estimates the size of the market at $715bn in AuM - compared to $114bn in 2017.
Covid-19 has been a catalyst for change, with an increased focus on carbon neutrality and a surge of ‘green deals' worldwide. There is clearly a willingness among policymakers to channel money towards a sustainable post-pandemic recovery."
One of the central tenets of impact investing is measurability. Identifying positively impactful companies and weighing their impact requires great effort and a robust framework.
In particular, data collection is crucial - no one can hold companies to account without disclosure. Part of the work we have been doing is to seek better data on our investee companies, and that has been underpinned by investor interest.
We have also found that most businesses are eager to be part of an impact fund - to be included in a select group of companies that provide solutions and do environmental and social good. That is helping us to more easily engage, to encourage better disclosure and to help and guide companies in making positive change.
Engagement is more important than ever when you consider impact investing against the backdrop of the current covid-19 pandemic - a crisis that has really accentuated the need to step up efforts to deliver the United Nations' Sustainable Development Goals (SDGs).
The 17 goals are central to M&G's Positive Impact strategy, and that's why we decided to contact all our investee companies earlier this year to assess their continued alignment with the SDGs and the status of their impact mission.
We asked for an update on activities, efforts or initiatives undertaken to help address the impact of the crisis through supporting the business's stakeholders.
We also asked about measures that were directly aligned with the company's purpose, and how each company balanced the interests and wellbeing of its workforce with issues such as executive compensation.
We received responses from 80% of out holdings and several interesting themes emerged from the responses, such as business model flexibility, the development of new products and repurposing of existing ones. Many provided covid-19-specific relief.
Japanese-based Horiba, for example, created an analytics device that detects internal inflammation in the body - which can be used for initial screening of the coronavirus. Similarly, Ansys in the US used its simulation software to simulate healthcare scenarios, like visualising how cough droplets spread between people.
Others provided community support - such as American company Republic Services, which launched an initiative to recognise frontline workers, and helped support small business customers and local communities.
Eighty-eight per cent of investors that responded to GIIN's 2020 survey reported meeting or exceeding their financial expectations. The growth of impact investing is only set to continue as more people see that it is possible to make a financial return while delivering positive benefits for society and the environment.
Questions have been raised over valuation levels of sustainability themed stocks. It's important to bear in mind that some investors are (and will be) more willing to value intangible societal virtues even if they can be difficult to stick in a financial model.
It's true that media attention and the potential for future growth can lead investors to run in the same direction. That's partly why some electric vehicle companies and early stage tech IPOs look exuberantly priced at the moment.
There are, however, plenty of cheaper and less ‘in vogue' companies out there that deliver impactful products and services - whether they are micro-lenders in developing countries, campus education organisations or healthcare companies.
Covid-19 has been a catalyst for change, with an increased focus on carbon neutrality and a surge of ‘green deals' worldwide. There is clearly a willingness among policymakers to channel money towards a sustainable post-pandemic recovery.
However, it's important to bear in mind that the crisis has had a detrimental effect across many social areas, exacerbating existing problems and leading to increased poverty, stressed supply chains and rising gender inequality, to name a few.
The awareness among governments is there, but following a downturn it can be a lot easier to focus on environmental issues when kickstarting an economy. Nevertheless, I think we are likely to see a second wave of government action on the social side over 2021.
John William Olsen is manager of the M&G Positive Impact strategy