Active Ownership: An Underappreciated Impact
Oliver MacArthur, of Aon’s Responsible Investment Team, argues that meaningful positive social and environmental impact can be generated by active ownership across a broad universe of companies, and alongside investments deployed to capitalise companies explicitly delivering solutions to sustainability challenges in listed equities.
How is 'impact' generated?
The Global Impact Investing Network defines impact investments as "investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return." Investors are posed with the question: How?
A global coalition of impact investors known as The Impact Management Project (IMP) provides a useful steer; they consider an investment's impact to be a function of the underlying assets the investment supports, and the contribution the investor makes to enable those assets to achieve that impact.
Impact via solution providers and engagement
Investors seeking to emphasise impact using underlying assets are lead to a narrower set of companies delivering specific solutions to environmental and social challenges. These companies are 'solution providers' and their business segments can be mapped to the various Sustainable Development Goals, with hurdles typically ranging from 20-50% of profits or revenue. Investors seeking impact through engagement can use the tools of active ownership to improve business practices to build a more sustainable environmental and social corporate profile.
Products and services: A disproportionate focus on the visible impact?
For investors seeking social impact, typical investment themes include education, financial inclusion, basic needs and sustainable products, and focus on SDGs 1-5 and 8-12. For investors with an environmental focus, typical investment themes include energy efficiency, water solutions, pollution mitigation and renewable energy, which map to SDGs 6-8 and 13-15.
While investment in solution providers is a core part of impact investing in listed equity, there is a danger of a disproportionate focus on visible impact. A credible opportunity set of 'solution providers' ranges between 15-20% of the listed equity universe by # of companies. Investors should be mindful of the risk posed by the potential opportunity set constraints over the medium-term, but also more optimistic regarding the potential of engagement impact.
Engagement impact can be a powerful tool for impact investors to deliver long-term shareholder value within a broader opportunity set. Typical engagement impact initiatives include encouraging environmental stewardship, promoting stakeholder relations, developing disclosure, connecting value creation with impact, and aligning corporate strategy with SDGs. For pure-play solution providers, engagement impact can be delivered through long-term active ownership to support efforts to increase scale and broaden the impact of the company.
Re-orienting business models: The case for engagement impact
Engagement can deliver impressive real-world impact, and there have been significant achievements through collaborative engagement initiatives such as Climate Action 100+, the Transition Pathway Initiative and the Mining and Tailings Safety Initiative. It is great to see multiple stock-level examples of engagement successes from impact equity managers to promote more sustainable business practices and product mix.
Questions in finance are often reduced to reductionist and rational scores, some form of quasi-scientific ordinal rankings or binary frameworks seeking to impose easy answers to issues of wicked complexity. Indeed, the generation of impact in listed equity need not be framed solely in the prism of thematic, purposeful solution providers who provide a straightforward story to articulate in a colourful pitchbook. Concerted efforts have been made to encourage the broad universe of companies to capitalise on the opportunities arising from the transition to a more sustainable global economy, and a narrow conception of impact constrains the potential of much more significant real-world positive change and value creation. There is a danger that the noble pursuit of perfection may become the enemy of the good.
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