IFAM: With increasing emphasis on disclosure and transparency, are there particular tools you find useful for assessing impact/sustainability of individual businesses?
BCM: Starting at the foundations, at M&G we have a well-established ESG integration programme which employs a broad range of tools and data to inform and enhance our investment thinking. This is supported by our sustainability and stewardship team but is really put into practice by the analysts and fund managers.
We use a range of information and data sources. For us information from investee companies is the primary source of our ESG analysis and a crucial part of our stewardship role. As part of our integration approach we aggregate selected data from external providers into an internal scorecard and toolkit. This can sit on fund managers’ desks and while it incorporates information and data from companies and third parties, it also includes the M&G analysts’ informed view on the issues at hand. So it’s not just the work of the Sustainability & Stewardship team, it’s the sector analyst giving their specialist view too. It’s a collaborative effort.
On alternative data sources, we’re using them more and more. We have developed tools to understand the risks and opportunities arising from various climate change scenarios, giving us a richer, more forward-looking perspective on this crucial issue. On challenges like health, supply chains, biodiversity and others, there are varied data sources that can support our analysis. On biodiversity for example, investors need to consider how our investments are reliant on the natural world and can either support it or damage it. Useful tools here include using geo-spacial mapping data to help us understand the ecological footprint of an investment, highlighting where a company might be contributing to deforestation through its business activities. Impact investors can invest in companies providing solutions to address this huge challenge, for example by rebuilding natural eco-systems.
Which brings us to our impact investing approach, where we use all these approaches and more. When a fund has an objective to contribute to the Sustainable Development Goals (SDGs), we need to assess that contribution and measure the impacts as effectively as possible.* We conduct our own analysis which incorporates company-reported information and independent data sets, but where there are gaps in the data we can also look, for example, at academic reports into how social inclusion can be boosted by access to finance, or scientific studies on improved health outcomes from a particular treatment. We are exploring tools which allow us to conduct an independent ‘net impact’ assessment of a portfolio, supporting our analysis to ensure that our investments, while contributing to one goal, are not negatively affecting another goal.
IFAM: Having identified target investee companies, does liquidity cause many problems for you?
BCM: This will vary for different asset classes. For impact investors in public markets, investing in listed equities for example obviously makes liquidity easier. Part of our aim in setting up a positive impact investment approach was to help democratise impact investing – to be able to make these investments available to the general investing public. The higher liquidity in public markets is important in enabling us to deliver on that goal.
But within listed markets there are still ranges of liquidity. In our Positive Impact strategies in Equities we focus on three types of investment. It starts with ‘Pioneers’ or early-stage – sometimes less liquid – businesses which are using innovation to deliver positive long-term impacts on social, environmental and economic challenges. Then we go up the scale towards ‘Leaders’ , the more mature, established business models that tend to be more liquid. In the middle are ‘Enablers’ which are using technology or other skills to help others generate a positive impact.
We think in a listed-equity strategy it makes sense to have a focus on those earlier-stage pioneering businesses, but in the interests of overall portfolio liquidity you need a decent balance between smaller, medium and large-sized businesses. So, in listed-equity, liquidity helps you define the type of investment and provides context to the type of impact you can have, but it’s not a massive challenge.
In the traditional home of impact investing – private market or Venture Capital investing – liquidity is clearly more of an issue. Such strategies represent the origins of impact investing but are not necessarily available to the public through investment funds. We have impact-focused strategies in private & illiquid debt and private equity, and in development in Alternatives, which invest for impact where liquidity is more of a constraint. However, investment opportunities are growing fast in these areas as the world recognises the need to scale up the capital needed to solve the most urgent societal challenges.
IFAM: Is the popularity of responsible investing leading to market anomalies?
BCM: In public markets, the shift towards sustainable investing – and an increasingly supportive regulatory backdrop – has been leading investors towards a focus on certain types of company, most obviously in areas such as clean tech or renewable energy.
As a valuation-focused investor we’ve got to be mindful of that. Long term fundamentals in this area are compelling but we avoid over-heated areas where momentum has extended beyond those fundamentals. We need to be able to see a return on our investment over the long term.
For our listed equity impact approach, our rigorous “triple i” impact investment approach means that we are strict about the types of investment we make. We are looking for companies not only with high quality business models but with a clear societal purpose and measurable, positive impacts, where we want to understand the proportion of the revenues which contributes to the positive impact. Our stringent approach here naturally steers us away from some of the hotter areas that don’t live up to our scrutiny.
However, we should add that the more sustainability is incentivised by technology, societal preferences and regulators, the more the investible market grows, and more and more companies enter our universe as potential ‘positive impact’ candidates.
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