Investment Week (17.06.2020) - In response to growing concern about global issues, impact investing is in increasing demand, and has become essential in the view of many shareholders.
The niche channels of private markets, to which impact investing has so far been confined, are no longer sufficient to support the expansion. The magnitude of environmental and social issues that we face requires large-scale solutions that only the public equity market is large enough to provide, with active engagement by fund managers to line up company practices with investors’ values.
One lesson that will likely stay with us long after COVID-19 will be the realization of how connected we are. The big issues affecting our planet are not local. Good access to healthcare, education, sustainable food production, climate change, sustainable and clean cities and supply chains are not only developing country issues. We are witnessing that problems arising in the remotest corners of the world have the potential to deeply affect our lives. The only way is to develop global solutions for the planet and all the people on it. This job is too big just for governments, philanthropy, development finance and startups. We need the power of large public corporations. There are many fixers among them and they are likely to be richly rewarded for the innovative solutions they provide for a better planet.
In recent years the idea of what a firm should be providing its shareholders has evolved from purely maximising financial value to improving welfare too, in step with the growing demand for sustainable investing and increasing focus on environmental, social and governance factors. Yet while demand for such investments is high, accessibility is low. Only a fraction of those who would like to opt for a sustainable investment portfolio have done so, for lack of availability of the products they seek which are addressing their concerns about such issues as the planet, plastic pollution, climate change, working conditions, and wages.
For these unfulfilled investors to find the candidates they are looking for, impact investing needs to spread further out of private markets and into public equities. Some sceptics do not see how public equities, which deal mainly in secondary capital, can fund impact directly. But equity markets are capital allocators and by allocating more capital to impact companies on a wider scale, investors can reduce the cost of capital for those firms, supporting their growth and investments.
In fact, the public market is the only vehicle that can give direct access to retail investors who want their savings to make an impact.
Likewise, for impact companies, given the increasing weighting of passive index investing in equity markets, without a specialised segment of the equity market focusing on impact equities, these companies would find it very difficult to attract capital on a large scale. They would be starved of capital without the involvement of active managers specifically allocating assets to impact investments.
There is another factor that is required to empower impact investors and their capital (in addition to effective impact data collection and analysis): deeper engagement by fund managers with public companies in order to encourage those firms to align their practices and offerings with their clients’ values. To achieve this, the fund management industry is having to transition from the two-dimensional client profile consisting of risk and return to add a third strand of data relating to these client values.
As a result of relentless stakeholder engagement, including from NGOs, consumers, asset owners and fund managers, some companies have completely transformed their business practices. This proves that fund managers can work together towards more effective engagement, and this has already started.
The transformation of one company can have a domino effect in its sector and create a virtuous circle of businesses constantly striving for higher standards of corporate behaviour.
Like in the US technology sector, interactive ecosystems of universities, angel and venture-capital investors, accelerators, incubators, regulators, NGOs, IDFs, foundations, charities, private equity and debt investors could support the founding of thousands of start-ups in other regions and sectors. In the same way as in US tech, the most successful of those could feed the public equity markets via IPOs while public equity markets would reduce the cost of capital for companies along the value chain while enabling all types of investors to achieve attractive returns.
Given that the estimated resources needed to reach the UN’s Sustainable Development Goals is at least USD 3 trillion and could be as much as USD 7 trillion, impact investing cannot reach the scale required without the involvement of public equities and the support of actively engaged stakeholders. Private markets have been crucial and formative for impact investing, but the asset class has grown and now needs a bigger park to play in. And its guardians, equity managers, must continue to build on work achieved so far, integrating impact data collection and assessment into their processes, getting to know their investors’ value preferences and, most importantly, increasing engagement with companies to guide them to their shareholders’ values.
Eli Koen
Portfolio Manager
