Investing in publicly traded stocks with the ultimate goal of bringing about environmental and/or social change is an indirect approach – it lacks the immediate effect, or “additionality”, that investments in specific projects offer. This is also the problem some investor advocacy groups have with this broader concept of impact investing. Whilst there is no simple conveyor belt between the investment and the effect, we think that the results can be convincing.
This has to do with what we call a two-step model. In a first step, an impact investor influences a listed company through engagement and the allocation of capital. This should ultimately result in lower financing costs for these companies. In a second step, companies can grow the businesses with superior impact credentials faster, scaling up the beneficial effects of their products and services on the environment and society.
Sharpen your impact objectives
Once you are propelled onwards by a sustainable wind in your sails, you will at some stage want to set your own course. We do this by focusing on eight “impact pillars” that address what we see as the most pressing issues humanity faces, where our investments can make a real difference. These eight pillars are resource scarcity, rising pollution, climate change, global water problems, aging population, health problems, food distribution issues, and growing inequality. These pillars then support some of the much broader UN SDGs (see figure below).
What gets measured gets done
The last step in the investment process may be the crucial one. There is no convincing anybody of the uniqueness of your approach if you have nothing to show for it. Therefore, it is important to define key performance indicators (KPIs) and track their development over time. The better your results and the more rigorous your tracking, the more credible your offering will be. The measurement should in our view be coherent with global criteria as defined by IRIS+, a globally recognized system with standardized impact indicators. IRIS+ is the generally accepted impact accounting system of GIIN that leading impact investors use to measure and manage their impact. The IRIS+ framework ensures a reasonable level of consistency in impact claims and reporting. The following figure gives an overview of some of our KPIs.
In a world facing many sustainability challenges, we think that investors should expect strategies to deliver both measurable positive impact to our society as well as investment performance and that the long-term power of investing in such a strategy generates greater benefits than traditional investment strategies.