4 min read
Investing in companies that create value/impact for the world, is not just for “impact investors”. All investors can (and should) adopt such a lens, as our decisions shape the world we live in and impact investing pioneers have proven that such an investment philosophy can bring attractive returns.
With the power of capital allocation, investors have a responsibility in being good stewards of this world. Let me give you an example from Wellington Management, which invests in companies where at least 50% of their revenue comes from solving a key issue in the world. Its Vice Chair, Wendy Cromwell, had many encouraging case studies to share at the AVPN Virtual Conference 2020 such as investing in companies that harnessed the power of technology to prevent water loss during transportation (almost 70% of water is lost during transportation in emerging markets); Wellington also invested in health tech companies to provide cheaper healthcare screenings, shorten administration processes, and even detect viruses including COVID-19, allowing doctors to spend more time with critical patients. Yet, not every investor is able to find such a strong portfolio:
“Typically, companies that are solving the world’s biggest problems have good growth prospects. We find that they are typically underfollowed (by the market) and misunderstood (because others are not looking through an impact lens to understand their prospects). For these reasons we think they can be attractive investments.” Wendy Cromwell
As such, the AVPN Conference provided advice to new entrants into impact investing on how they can start investing sustainably in companies for impact. Here are a few key steps:
1. Encourage improvement across the portfolio by:
- Reexamining existing portfolio to invest for impact
“It is not simply investing in solutions, but taking a deeper look at whether our portfolio is adding to the problem or how much of it is either helping, either in terms of mitigation or adaptation,” says Annie Chen, the principal and Chair of RS Group, a Hong-Kong-based based family office. Not only has Annie challenged RS Group to invest its own capital sustainably, she has made conscious efforts to seed/support particularly innovative philanthropic or impact investing strategies to enable the mainstreaming of environmental and social considerations in the wealth management context, particularly within Asia where such practices remain nascent.
- Investing in companies whose business creates positive impact
“There is significant impact from investing in the bad companies and changing them, versus investing in the good companies and sitting on them at the same level of sustainability,” says Florian Heeb, a researcher at the Center for Sustainable Finance and Private Wealth (CSP) at University of Zurich, which looks at the impact of sustainable investing approaches in the real world, and investors’ sensitivity to impact.
2. Support systemic change by identifying companies that addresses issues in the world, for example,
- Technology enabling the improvement of livelihoods (eg. Gojek loans & financing)
- Last mile access to nutritious foods:
investing in a company that produces affordable vitamins for emerging markets
- Green solutions that improve livelihoods:
“Asia is the largest production base, and this has resulted in high carbon emission. Going forward, the opportunities for impact include nature-based solutions, and companies that provide alternative solutions. Other opportunities in Asia include technology enabling to improve the lives of people (such as Gojek’s loans & financing) and sustainable finance,” advises Robin Hu, Head of the Sustainability and Stewardship Group at Temasek International. Temasek is an investment company headquartered in Singapore with a portfolio that covers a broad spectrum of industries, from transportation to agribusiness.
3. Measure your impact, but be flexible too
- Metrics that can be used to measure the impact success include number of quality jobs created, gender impact, suppliers & beneficiary/customer demographic.
- For some useful resources to aid investors in measuring impact with metrics, do check out IRIS+ by Global Impact Investing Network IRIS+, and Impact Management Project IMP. These 2 resources provide each a unique methodology of metrics to measure the impact of the companies and other resources including evidence and research to aid investors in the investment process.
- For investors ready to venture to private companies, companies with positive impact lack access to flexible capital, but do caution on possible lower risk-adjusted financial performance.
In summary, impact investing has been growing and hitting the radar of the investment community, with ESG funds outperforming the current market, increasing standardization of impact measurement, and estimated by GIIN a total of USD715bn in impact investing assets worldwide. But as Amit Bouri, CEO of Global Impact investing Network (GIIN) says, we need to continue in the progress of educating, recruiting, and getting all onboard this vision of impact investing.