Holistic and Intentional Impact Investing

    Flows into sustainable investing are booming resulting in a growing demand for increased transparency and accountability in the sector. How these investment products are labelled is critical for their credibility but the differences in definition still remains a challenge.

    Seb Beloe, Partner and Head of Research, WHEB

    “The popularity of ESG, sustainable and impact investing has been increasing over the last decade. The impact space is no exception to this trend,” says Seb Beloe, Partner and Head of Research at WHEB, a UK boutique asset manager that offers a global equity impact strategy that invests in midcap companies which enable the transition to a more sustainable and zero carbon world.“According to Morningstar, impact funds accounted for approximately 1% of all investment funds, in Europe, worth approximately €105 billion in 2020. In terms of net fund flows in 2020, the proportion is considerably greater, with approximately 5% of all European net fund flows (€21.5 billion) going into impact funds,” Beloe adds.

    As a result of this boom, concerns have emerged over a weakening of standards. “Respondents to the 2020 Annual Impact Investor Survey identified ‘impact washing’ as the greatest challenge facing the market. With so much noise around ESG, as well as ‘impact washing’, transparency and authenticity have become essential. The differentiation between funds is becoming increasingly challenging,” Beloe argues.

    Understanding what is meant when we speak of impact investments is the foundation to clarify what is at stake and the parameters used to assess asset managers’ performance. Asset managers need to decide whether they want to take holistic or traditionalist approaches to impact investing, whether intentionality or additionality is the core informing criterion, as well as deciding whether they want to invest in listed or private companies.

    Traditionalist Vs Holistic Impact

    One of the core debates in this field focuses on whether the investor is having an impact or whether the investment is impactful. “Generally speaking, there are two approaches to impact in the investment community. Some chose to focus on the impact being delivered by the underlying asset (‘enterprise impact’), while other chose to focus on the impact delivered by the investor (‘investor impact’ comprising investor ‘intention’ and ‘contribution’),” Beloe explains.

    According to Beloe, WHEB distinguishes between the “traditionalistic” and the “holistic” views of impact. “The traditionalistic view of impact investing focuses on the individual investments and holds that an investor’s impact needs to be ‘additional’. That is, any positive outcome would not have occurred but for that investor’s specific investment. This traditionalistic view is necessarily restricted to philanthropic activity or at best to situations where new capital is invested in markets with very poor liquidity,” he says.

    “A ‘holistic’ approach focuses instead on investments as part of the financial system, emphasising the interdependencies between different asset classes. This view holds that investor impact is founded in the investor’s intention to deliver positive impact and is then delivered through investor contributions. This holistic view recognises the ‘intense’ impact generated by investments demonstrating additionality, but also embraces a spectrum of more ‘diffuse’ positive impact delivered through other mechanisms. These include changes in the cost of capital, engagement and wider signalling,” Beloe adds.

    Intent Not Additionality

    Depending on the preferred impact approach, investors will tend to inform their capital allocations based on companies’ intent or on the additionality they provide. “We believe that the concept of additionality does not provide the most practical approach to determining whether an investor is an impact investor. Instead of focusing on whether an investment is additional or not, a more appropriate standard, aligned with the GIIN and IFC definitions, focuses on the investor’s intent,” Beloe argues.

    “In our view, this intention is at the core of what it is to be an impact investor. The impact narrative needs to be a significant part of the investment story and the investor needs to intend for the investment to contribute to positive impact,” Beloe adds.

    This definition is also aligned with the preferences of WHEB’s clients, which see their capital as an extension of themselves and a way to project their values on to the world. WHEB’s role is to channel this capital to fulfil its purpose by intentionally directing it into companies that deliver positive impact,” Beloe explains.

    WHEB’s Holistic Impact Approach

    According to Beloe, WHEB is very much on the ‘holistic impact’ camp that focuses on the intent of a business. “Our investment decision is explicitly rooted in the enterprise impact of the business. Our intention is to contribute to positive impacts through enterprise and system-level contributions. We document and report on our investment intentions and contributions to underpin our claims to positive impact,” Beloe says.

    “Establishing demanding but pragmatic standards that require clarity in investment intentions, and evidence of investor contributions, is essential if impact investment is to retain its potency. These standards will enable impact investors to harness the full potential of capital markets as a whole to drive positive impact at scale,” Beloe explains.

    “We want to change finance. Our mission is to advance sustainability and to create prosperity through positive impact investments. We are a certified B-Corporation, which means that we have embedded our ambition to benefit all stakeholders in our legal structure, rather than prioritising shareholders at the detriment of others,” Beloe adds.
    WHEB runs a benchmark agnostic US$2 billion global equity impact strategy focusing on environmental and social themes, which represent approximately 60% and 40% of investments, respectively. The strategy qualifies under Article 9 of the EU’s Sustainable Finance Disclosures Regulation (SFDR).

    The fund invests in assets based on a 9 sustainability themes focusing on cleaner energy, education, environmental services, health, wellbeing, safety, resource efficiency, sustainable transport and water management. To this end, the fund also targets seven SDGs, including sustainable cities and communities (SDG11), affordable and clean energy (SDG7), industry, innovation and infrastructure (SDG9), responsible consumption and production (SDG12), clean water and sanitation (SDG6), good health and well-being (SDG3) and quality education (SDG4). All investments are conducted in developed markets, mainly in the USA, but also in Europe, Japan, the UK and Australia.

    “We invest in companies that facilitate the transition to a carbon neutral economy by providing products and services that enable other companies to be more sustainable and climate friendly. When H&M or IKEA make net-zero commitments, the focus is on how they design, source and manufacture their products, how they run their buildings and manage their logistical networks. We invest in the companies that will help companies like these make the necessary adjustments to fulfil those commitments,” Beloe says.

    “To get a pure exposure to the transition, we need to invest in the companies that are delivering the change we need. It’s not about investing in a large company like Unilever, which is going to continue to sell goods like soap and ice cream. The focus is on the companies that help Unilever make the transition into selling more sustainable soap and ice cream,” Beloe adds.

    Implementing a Holistic Approach

    According to Beloe, WHEB’s investment process follows a two-stage approach. First the asset manager narrows down the investment universe and then it finds the best opportunities within this subspace based on its impact map.

    “The investment process begins by excluding ‘Business at risk’, such as ExxonMobil and Royal Dutch Shell, which are likely to struggle with the transition to a carbon neutral economy.  Companies that are ‘Transitioning’, such as Apple, Alphabet, Amazon, Microsoft, or Unilever are also not included in the company’s investment universe. Only companies that provide ‘solutions to sustainability challenges’ are considered for WHEB’s investment strategy,” Beloe says.

    Companies whose products have a positive impact include Aptiv, which focuses on green and more connected mobility solutions, Arcadis, a design & consultancy for natural and built assets and Vestas, a manufacturer of wind turbine blades.

    Once the investment universe has been trimmed down to the sustainable growth providers, stocks are selected based on WHEB’s proprietary impact mapping approach, which contrasts the rating of a company’s fundamental quality with the rating of its product or service’s impact intensity.

    ESG analysis is integrated in the assessment of a company’s fundamental quality, including market attractiveness, competitive position, value chain, the quality of its management and its growth strategy. “On the ESG front, we focus on regulation, reputation, quality control corporate governance and investee companies’ assessment of sustainability opportunities,” Beloe says.

    WHEB’s Impact engine is an analytical tool, which asks questions about the different dimensions of a product’s positive impact. This allows the analyst to assess the business’ impact intensity. “We use our ‘Impact Engine’ to analyse a company’s positive impact and what it actually provides. At this stage in the investment process, we think about the vulnerability of the beneficiary, the criticality of the outcome to the beneficiary, the size of the impact, how widely applicable the product is, how central the product impact is to the outcomes and how unique the contribution is,” Beloe explains.

    Impact Via Listed Equities

    Finally, Beloe is keen on emphasising the impact that can be found in listed equity markets, which are sometimes seen as being too liquid to make a difference. “The traditionalistic view holds that impact investing in listed equities is not possible. Ostensibly, listed equity investors are unable to influence the cost of capital of investee companies,” Beloe argues.

    “However, we would argue that this perspective ignores the systemic nature of finance and the economic system,” Below argues. “Although individual transactions have less effect on the cost of capital as the market becomes larger and more liquid, that is not the same as saying that those transactions have no impact. Clearly every participant has some say on where prices are set,” he adds.

    By increasing equity prices, listed equity investors lower the cost of capital for the investee company, according to Beloe. “Higher share prices can facilitate acquisitions by allowing businesses to use their equity to finance deals. It can facilitate businesses to leverage their equity to pursue more activity and enable the company to scale up more quickly and deliver greater positive impact,” he explains.

    During volatile markets, small investors can often significantly influence prices, according to Beloe. “By way of analogy, it would be ludicrous for an individual football fan to claim that it was her singing, and not the thousands around her, that inspired her team to win a game. But as a community all singing together, fans do create an atmosphere that has a clear bearing on the outcome of a game,” he concludes.

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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