A common misconception around responsible investment approaches is that investment returns must be sacrificed in exchange for positive environmental or social benefits. In this article, we find out why this isn’t the case for impact investors.
Balancing good impacts with good investments
Impact investors look for companies providing solutions to the world’s most pressing social and environmental challenges. But this isn’t enough on its own. Alongside delivering intentional, measurable positive impacts, the companies also need to be quality investments with the potential to deliver good financial returns.
Impact investors will examine the company’s business model, risks, competitive position, and how it allocates capital. The company should be in a position to reinvest profits, helping to compound both its impact and earnings over the long term. Furthermore, the company’s share price should be valued attractively in comparison to what the investor believes is its intrinsic value.
Challenges in 2022
Impact equity funds have faced a number of challenges this year. With rising prices and the prospect of higher interest rates from central banks, many investors have rotated out of high-growth stocks and into commodities and perceived ‘value’ stocks – neither of which are commonly held in impact funds.
However, as a short-term shift in market sentiment, this doesn’t necessarily change the fundamental outlook for impact investors. Instead, the lower relative stock prices could be seen as an attractive entry point for those looking to invest in impactful companies over the long term.
Opportunities from structural trends
Over a longer time horizon there are many structural trends from which genuinely impactful companies stand to benefit, as capital flows into these areas from governments, industries and consumers. Here, we take a closer look at two of these trends.
The race to net zero
To meet the goals of the Paris Agreement on climate change (limit global warming to 1.5 degrees above pre-industrial levels), the world must reach net zero carbon emissions by 2050. BloombergNEF estimates that this will require between US$92-173 trillion of clean energy funding over the next 30 years, with annual investment doubling from today’s level.
Of course, companies producing renewable energy and the associated infrastructure will play a huge role. But there are also opportunities for a diverse range of companies providing solutions across many other industries, as the world looks to cut emissions, reduce waste and improve efficiency. For example, semiconductor manufacturers, waste recycling companies and insulation producers.
Evolving healthcare needs
There are numerous trends driving increased demand for healthcare over the coming decades. Global life expectancies are currently increasing, and the UN estimates that by 2050 more than 16% of the global population will be aged over 60, up from 9% currently. An older population will require greater spending on medical products and services.
Similarly, changing diets and activity levels are causing an increase in lifestyle diseases such as diabetes, meaning higher demand for preventative solutions, diagnostics and treatments. And increasing income levels across many developed and developing markets should also lead to greater healthcare spending.
We expect these trends to offer exciting new opportunities for healthcare companies. Not just those providing traditional healthcare solutions, but also those looking to drive improvements through innovation and new technology, such as genomic sequencing or at-home monitoring.
Taking a long-term view
In our impact equity strategies, we aim for an average holding period of at least 5-10 years for our investee companies. This means choosing companies that we would be happy to hold over many economic cycles, which we expect to be resilient through periods of high and low growth. Importantly in the current climate, we also look for companies that can withstand an inflationary environment.
We believe the trends highlighted in this article, which will transcend many economic cycles, have the potential to help investee companies continue to grow regardless of what the wider economy is doing. We also have a preference for companies with very strong market positions and high pricing power (the ability to raise prices, without affecting demand for their products). Finally, we may also look for companies whose core focus is on improving efficiency. If inflation continues to rise, we would expect increased demand for these solutions as other companies aim to reduce their costs.
In summary, while 2022 has proved challenging so far, we remain confident in the future prospects for investors looking to make a positive impact against some of the world’s most pressing challenges. Rather than impact investors compromising on returns, we believe these long-term trends have the potential to deliver strong financial gains for those who can identify quality companies offering solutions. In turn, allowing clients to put their savings to work with a purpose.
Investing towards a better future
At M&G we believe the investment industry needs to evolve. Rather than short-termism and quick wins, we believe investing requires forward thinking, a long-term outlook and active engagement with companies. Helping them to adapt and make a more meaningful and lasting impact on our world.
When it comes to the world’s most pressing issues, there’s no quick fix. But by investing sustainably in a pragmatic and measured way, we can work towards a future that’s better for everyone, delivering positive returns for both investors and the planet.
The value of a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
For Investment Professionals, Institutional Investors and Professional Investors only. Not for onward distribution. No other persons should rely on any information contained within.
This information is not an offer or solicitation of an offer for the purchase of shares in any of M&G’s funds.