What is the background to the M&G Positive Impact Fund?
The concept of impact investing is not new, but until recently, it was largely confined to the private equity and private debt areas. This meant it was the preserve of institutional and high net worth investors. Impact investing has now expanded into the listed equity space, with institutions such as the Global Impact Investor Network making a concerted effort to draw money from a broader investment pool. With this fund we seek to open up impact investment to a wider audience.
How are you defining ‘impact’ for this fund?
The impact needs to be fully aligned with the company strategy. It needs to be the majority of what a company does and make a material difference to the company’s fortunes. In other words, it is about materiality and measurability.
There are six different areas we target in the fund: three relate to the environment – climate solutions, clean air, water and land, and the circular economy, which is about reducing waste, re-using and recycling. Three have a social purpose – better health, better work conditions and social equality. It can be more difficult to find investments here, but we are looking at areas such as technology to promote financial inclusion, as one example.
It is worth noting that, in the impact world, investors used to only consider the investment impact – that is, the specific impact achieved as a result of a specific investment – but increasingly they also want to consider whether a company has a positive social or environmental impact. The two are not incompatible, and we think companies whose products and services meet some of these acute social or environmental needs are set to exhibit strong growth characteristics.
What is the purpose of the fund?
We want to beat the MSCI All Countries World index over a rolling five-year period and to invest in companies that aim to have a positive societal impact. We believe that companies able to generate an impact alongside an equity return have a significant tailwind.
How do you research companies for inclusion in the portfolio?
We have developed a three ‘i’ methodology to analyse companies for inclusion in our watch-list: this examines investment, intention and impact. For stocks to be considered they must score above average in all three areas. The investment case has to be sound and the company’s intention is vital. What is its culture? Its mission statement? How does it intend to deliver positive impact? It can’t be an accidental outcome. The impact is assessed, in part, through a ‘results chain’ framework – this is the same framework used by the Gates Foundation and World Health Organisation. We also map companies’ intentions to the UN Sustainable Development Goals.
Our impact team considers the three ‘i’s of every potential investment, and we require full consensus from the team before a company makes it on to our watch-list. If one person disagrees then it doesn’t make the list.
Does this lead you to certain areas of investment?
The fund tends to have a growth bias, while this type of investing also generally lends itself to smaller companies. Large companies are often conglomerates and can have a lot of negative impact elsewhere in their businesses – it is easier to find impactful smaller companies.
It is also easier to find companies in emerging markets that provide solutions for these environmental and social issues, simply because there are more issues to solve. The opportunities across different geographies can be very different. Banks in emerging markets have an important social purpose, facilitating micro-lending, for example, in a way that they don’t in developed markets. But it is easier to find sophisticated technology companies in the US. However, we don’t seek to generate returns as a result of our geographic allocation; this is only through stock-picking.
This is a long-term strategy, with the intention of holding an investment for five years or longer. We think this gives companies time to generate impact, and they know that we are long-term shareholders, providing committed capital. And we are focussed, holding fewer than 40 stocks in the portfolio.
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