Investing for impact is truly exciting. For many of us, putting our investments to work in a way that delivers wider benefits alongside potential financial gains, is a compelling proposition.
Launched in November 2018, the M&G Positive Impact Fund has two aims – to generate greater total returns over five years than the MSCI ACWI Index of global shares, and to invest in companies that have a positive impact on society through addressing the world’s major social and environmental challenges.
To successfully deliver on this dual proposition for investors, we believe it is essential to have a robust framework that can identify and measure the impact of investments.
Picking impactful companies
To arrive at our concentrated portfolio of around 30 impactful companies from anywhere in the world, we take a highly selective approach to stock picking.
After screening out companies too small for us to consider, our first step is to eliminate companies that are not capable of delivering demonstrable positive impacts to society.
To do this, we screen out any companies that cause indefensible harm to people or the environment. This involves companies deemed to be in breach of the UN Global Compact Principles on human rights, labour, the environment and corruption. We then remove companies involved in certain sectors – namely the production of tobacco, alcohol, adult entertainment, controversial weapons, oil sands, nuclear power or coal-fired power, the provision of gambling services, or animal testing for nonmedical purposes.
Companies that pass these screens are then analysed under our “Triple I” framework, which looks to apply the tenets of impact investing to listed equities.
Our ‘triple I’ framework
We devised our approach as a robust and consistent way to rate the impact and investment case of companies for the fund, scoring companies on each of the three ‘I’s.
The first ‘I’ is the investment case. After all, we aim to pick companies that will deliver superior financial returns over the next decade.
For the second ‘I’, we gauge the extent to which companies explicitly and genuinely intend to address the most important issues facing the world, as articulated by the United Nation’s Sustainable Development Goals (SDGs).
The third ‘I’ encompasses the actual impact that a company has through its products and services.
Companies that are awarded above-average scores in each of the three ‘Is can then make it on to the fund’s watchlist of possible investments, provided all of the Impact team at M&G agree on its merits. Once on the watchlist, shares may be bought if the timing and price are right.
We are looking for companies that can generate more impact, the more profitable they are. We invest in three types of company – pioneers (whose products or services have a transformational effect on society or the environment), enablers (which provide the tools for others to deliver positive impact) and leaders (which spearhead and normalise sustainability and impact in their industries).
As impact investing gains momentum, there are legitimate concerns about ‘greenwashing’. To demonstrate how we aim to deliver genuine impact, we set a high bar for our investments.
Using the SDGs as a framework for determining the environmental and societal challenges that matter most, we can gauge whether a company is delivering impact that is meaningful, or material. We assign all of our investments a primary SDG that we believe they are addressing and determine specific SDG-aligned key indicators of performance. We then measure the materiality of the impacts they are achieving against these indicators.
We believe transparency is important, so we report to our investors on how we assess impact across the fund. We invite you to read about our holdings, and how they deliver impact, in the fund’s annual impact report.