Integrating impact investing in listed equity portfolios

Editorial note: This piece is sponsored by T. Rowe Price

Interest in impact investing is quickly increasing, and while strategies are growing across multiple asset classes, fund managers are developing strategies to capture the positive environmental and social impacts of listed equity investments with the goal of demonstrating how investment capital in public markets can create additional positive outcomes towards aims such as the Sustainable Development Goals (SDGs).

The Australian market for impact investing has nearly tripled over the past two years, from $5.7 billion to $19.9 billion, according to a recent study from the Responsible Investment Association Australasia (RIAA).

According to Benchmarking Impact Australian Impact Investor Insights, Activity and Performance Report 2020, "the vast majority of impact investment products are dominated by green, social and sustainability bonds ($17 billion), while the remaining $2.9 billion in impact investments held by Australian investors comprise real assets ($2.2 billion), private debt ($287 million), public equity ($195 million), private equity ($97 million), social impact bonds (SIBs) ($66 million) and others ($44 million)."

The study also finds that investors ranging from superannuation funds to family offices are indicating that they would like to increase their allocation towards impact investing by more than five times to $100 billion over the next five years, and invest in clean energy, housing, health and wellbeing, education and conservation, among other themes.

As demonstrated in the RIAA study, impact investing has been concentrated in fixed income and real assets, a growing number of fund managers are developing or have launched listed equity strategies that are linked to achieving positive social and environmental outcomes as well as financial return. Aligning portfolios with targets within the SDGs is one way of doing so, because it provides a framework for analysis as well as clear targets that need to be achieved by 2030 to improve people and planet.

The Global Impact Investing Network (GIIN), an influential voluntary collaborative body that focuses on reducing barriers to impact investment to increase capital flows to enhancing social and environmental aims, has set out four practices that define impact investing - intentionality, or the desire to contribute to measurable social and environmental benefits. Further practices include use of evidence and impact data in investment design, the management of impact performance, or the specific intention to manage investments to that intention, and contribution to the growth of the industry. GIIN has a listed equities working group that applies those principles to the public market sector.

Q&A with Hari Balkrishna, Portfolio Manager for the upcoming Global Impact Strategy in the Equity Division of T. Rowe Price

Q: How do you apply an impact strategy to a listed equities portfolio?

A:  If you look back at the past 50 years, shareholder expectations for governance was around maximising shareholder value, but now, expectations on companies are much broader. Environmental sustainability has gone mainstream, while social impact has also taken centre-stage. Increasingly, companies are innovating and delivering solutions to solve for these global pressure points. Hence, we think it is the right time to be able to access impact ideas through listed equities.

Q: What does this look like in terms of examples of stock selection?

A: I'll give you a couple of examples. One is a stock called DSM that focuses on sustainable aquaculture. Twenty percent of all fishing in oceans is done to feed other fish. DSM has an algae-based feeding solution for fish which basically, in theory, if applied cross the board, could reduce overfishing by 20%. At a public equity level, it's doing a lot of good in terms of reducing overfishing and creating a more sustainable aquaculture chain.

It's also possible to find social impact through education. Another stock is Hope Education Group in China, which focuses on vocational skills development and built, retraining graduates to access workforce.

Q: How do you measure positive environmental and social impact in public equities?

A: We've taken the view that we're going to build a completely proprietary impact database from the bottom up. That will identify, sector by sector, what qualifies a stock as social or environmentally positive, and we will invest in companies where there is materiality and measurability of impact. Specifically, we will look for the majority of revenues or profits tied to one of our impact pillars of climate and resource impact, social equity and quality of life or sustainable innovation and productivity.

Q: Is it possible to increase impact on social and environmental issues through investing in listed companies, as opposed to private market or real asset strategies?

A: By identifying companies that are driving innovative impact solutions, you're also creating a lot of impact because you're basically financing capital for these business and these business will drive the innovation agenda further and further. One of the companies we're invested in, they replace timber decking with composites decking made from recycled plastic. Their R&D is going to making that as efficient as possible. Our view is that you're creating impact by delivering that capital and facilitating that continued innovation.

Read more: GIINT. Rowe PriceGlobal Impact StrategyHari BalkrishnaResponsible Investment Association Australasia
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