Overview
The approach has twin aims: to generate financial returns and to deliver material environmental and social benefits.
The range of activities financed under the impact investing umbrella is wide. Recent examples include land rewilding, the construction of wind farms, the improvement of water networks and the development of orphan drugs.
It is the ethical focus of impact investing that explains why it tends to be seen as the preserve of private finance. Its moral orientation is widely deemed to be at odds with the principles of those who invest in - and construct portfolios containing - listed stocks. Yet recent developments in sustainable finance suggest this interpretation is in need of some revision.
Impact investing is, in any case, defined by its objectives not by the type of asset or transaction. According to the Global Impact Investment Network (GIIN) the primary aim of impact investing is to deliver a positive, measurable social and environmental impact alongside a financial return irrespective of whether that is through a public or private transaction. A key feature, therefore, is the explicit intention to contribute to positive societal or environmental outcomes.
Reinforcing that point is research by Kölbel et al. (2020)Kölbel et al. (2020), which suggests positive impact can be generated in public markets across two fronts – by the issuer of securities (a company, for example) and by the investor.
These observations have important investment implications. They provide a roadmap indicating how investors can apply the concepts of impact to listed stocks. While investing with impact in publicly-traded companies might appear more challenging than via private markets, it is nevertheless vital given the scale of the problems the approach is seeking to address.
But impact investing via listed firms comes with several caveats. First, for the approach to work, it must target listed businesses with exceptionally positive environmental and societal credentials or firms with the potential to improve across those two fronts. Second, success also depends on what follows once investments are made. Portfolio managers that can exert an ongoing positive influence on the companies they invest in are better able achieve their financial and sustainability goals. Third, those positive, non-financial, contributions must be measurable.
While many conventional equity strategies claim to integrate environmental, social and governance (ESG) principles, few possess the characteristics that impact investors deem the most relevant to bring about change. Thematic equity portfolios with an environmental or societal orientation are a potential exception. Not only do such strategies focus on companies directly involved in the building of a sustainable, more equitable economy, but they also play a role in embedding responsible investment principles across the broader financial ecosystem.
In this report, we explain how.
