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    Impact Investing – What Makes it Different?

    by Sarah Norris & Dominic Byrne, abrdn

    Many purists raise their eyebrows at the notion of a listed impact solution. However, we believe such investments solutions are a compelling way for clients to gain access to companies addressing the world’s challenges, while still achieving attractive risk-adjusted returns. Here, we explain how we aim to deliver these two objectives.

    The Rise of Impact Investing 

    Sarah Norris
    Investment Director Co-portfolio manager Global Equity Impact Fund
    abrdn

    Impact investing is distinct within sustainable investing. It does not focus solely on avoiding business practices, nor does it only assess business operations. It is about investing in activities that address global issues. 

    It’s no longer a stretch to argue that companies providing solutions to the most pressing global risks have the opportunity to profit. In the investment community, this has led to a groundswell in demand and inflow of capital to impact investments. This is particularly evident in the public equity sector, where impact investing is becoming more established with the recognition that a spectrum of capital is needed to support global sustainability goals. Investment houses are launching a variety of impact funds and attracting more assets than ever

    However, within this area, there is considerable variation. For one thing, there’s no set way to define positive impact or to identify opportunities. There’s also no standard way to report on impact. So, it’s important to focus on how a fund defines impact and to make sure that it reflects the type of impact to which an investor wants to align their capital.

    Dominic Byrne
    Head of Global Equities Co-portfolio manager Global Equity Impact Fund
    abrdn

    Our Approach

    We define impact investing as the intentional investment to deliver financial returns alongside measureable, positive social and/or environmental change. To that end, we seek to identify and invest in financially attractive companies that are intentionally developing products and services that contribute to quantifiable, positive social and environmental outcomes. 

    We use the UN’s 2030 Agenda and its 17 Sustainable Development Goals (SDGs)to help us define positive impact and target the most pressing global issues. Ultimately, we are looking for companies providing local solutions to major global problems.

    What Are Our Impact Objectives? 

    We identified eight ‘pillars of impact’ that address these broad challenges, as follows.

    • Circular Economy
    • Sustainable Energy
    • Food & Agriculture
    • Water & Sanitation
    • Health & Social Care
    • Financial Inclusion
    • Sustainable Real Estate & Infrastructure
    • Education & Employment. Voici la mise en page.

    We aim to invest in companies whose products and services in each of these eight categories help countries achieve the UN’s sustainable development agenda. 

    How Do We Identify Companies With Impact?

    We take a financial-first approach to impact investing. We will only research, consider and invest in those companies that have strong financial upside. That means we only research a ‘buy’ list of stocks to find those companies that also meet our positive impact requirements.

    To identify impact investments, we use a ‘theory of change’ approach we call ‘impact maturity’.  We examine a company’s inputs, activities, outputs, outcomes, and impacts in three ’impact maturity’ stages: intentionality, implementation and impact. These stages build on one another. We expect to see companies mature as investments made in the ‘intentionality’ stage deliver revenue at the ‘implementation’ stage. Then outcomes can be measured at the ‘impact’ stage.  

    There is also a fourth category – ‘impact leaders’. These are companies whose products or services are part of a wider value chain, and support end-products in one of the pillars. 

    source: abrdn

    abrdn

    In our portfolio, we aim to have exposure to all eight impact themes, as well as good industry and geographic diversification. 

    There are numerous ways a company can have a positive impact, while helping to support the SDGs. For example:

    • supporting renewable energy storage and distribution
    • expanding education opportunities to rural and low-income students
    • improving treatments for priority health concerns
    • conserving natural resources by offering closed-loop solutions
    • expanding access to nutrition.

    Non-Financial Impact

    The Importance of Impact Reporting

    Reporting is an essential part of impact investing, and a critical client requirement. We’ve developed a reporting methodology that provides clients with a clear insight into the positive impact, delivered by companies we invest in. In particular, we aim to demonstrate how products and services delivered by companies can help countries meet the UN’s 17 SDGs. We aim to be as transparent as possible in our reporting so that clients will have a clear understanding of the positive impact a company achieves. 

    We agree with the Global Impact Investing Network’s view that “context is critical to interpreting impact results in a robust and reliable way.” Our impact report includes case studies and aggregated pillar-level data. But we also analyse the impact companies deliver according to country and region. This helps us understand how the impact delivered compares to the underlying country-specific issues and needs. Above all, we aim to frame the local impact delivered against the global issues our portfolio targets.

    Further Action at abrdn

    The Global Equity Impact Fund launch was among the first equity impact strategies launched, and our workaround using the SDGs as the basis for an investment framework has been the genesis for other sustainability strategies. 

    We recently launched the US Equity Impact strategy,  which uses the same process as the Global Equity Impact Fund and feeds new ideas into our Impact Universe. And we’ve launched the Global Climate and Environment Fund, focusing specifically on companies that sit in our environmental impact pillars. 

    The Global Impact Equity fund aims to give investors broad access to solutions across all 17 SDGs. However, we are cognisant that the climate crisis is of increasing importance to investors and wanted to provide a solution that specifically targets this demand. 

    Similarly, leveraging the impact guiding principles, in 2020 we launched the Asian Sustainable Development Equity Fund and Emerging Markets Sustainable Development Equity Funds. These aim to invest in companies with material alignment to one or more SDGs. 

    This is just the start. As we come to the end of 2021, much still needs to be done to ‘build back better’ and ‘build back fairer’, addressing both new and existing environmental and social issues. Encouragingly, many governments including the European Union, the 

    US and China have responded to the pandemic by making sustainability the cornerstone of agendas to address the economic and social damage caused by coronavirus.  But strained government budgets have limited capacity to invest in solutions to address these issues. We expect companies to step in to provide new solutions that focus on improving healthcare, more inclusive workforce opportunities, new circular-economy solutions, more resilient energy sources, and cleaner mobility and infrastructure. Now, more than ever, we at abrdn are convinced of the role of impact investing in supporting a greener, more inclusive recovery. 

    What Is the Future of This Trend In Impact Investing?

    There are three stand-out drivers supporting impact investing: regulation, consumers and investors. 

    In recent years, there’s been increasing regulatory backing for a transition to a more just society, as governments set policy to deliver on the UN’s SDGs. In response, we’re seeing more companies shifting their business models so they not only avoid fines and penalties for failing to manage social and environmental risks, but also capitalise on new opportunities created by demand for environmental and social solutions. 

    Equally influential are trends in consumer behaviour. There’s greater demand for more sustainable or ethical products and services in almost all industries. These include fair trade and organic food; addressing child and forced labour in the fashion supply chain; and access to affordable housing. To meet this demand, we’re seeing companies respond with new products that address these long-term challenges. 

    Investors too are focusing more on environmental and social considerations. There’s a broad consensus that managing ESG (environmental, social and governance) risks well is essential to delivering good returns. But, as we have shown, there’s also evidence that investing in companies delivering environmental and social solutions is a source of above-market returns.

    Furthermore, the Covid-19 pandemic has highlighted the importance of building a better and fairer society that tackles issues around employment, healthcare, and climate change. We, therefore, expect these trends to keep building. As a result, we believe impact investing will continue to grow in popularity and, eventually, become a core style of investment across asset classes.

    Final Thoughts…

    In addition to the regulatory pushes and consumer pulls, there’s increasing focus on environmental and social considerations from investors. There’s a broad consensus that managing ESG risks well is essential to delivering good returns. But because of regulation and changing consumer patterns, there’s also evidence that investing in companies delivering environmental and social solutions is a source of above-market returns. It’s no longer a stretch to argue companies that provide solutions to these global risks have the opportunity to profit. That’s because they’re providing solutions where there is significant need and significant unmet demand. 

     

    Case Study: Autodesk

    For illustrative purposes only

    Unmet need: the construction materials and building sector is responsible for more than one-third of global resource consumption – but it is estimated that companies recycle or reuse only 20- 30% of construction waste. 

    Intentionality: Autodesk is developing software that helps reduce waste throughout the building-construction process. This software seeks to improve the material efficiency in the construction of a building, and help customers develop net-zero-energy buildings that make up smart and sustainable cities.

    Implementation: according to the company, a conservative estimate is that at least 60% of its revenues are tied to improving the design, construction and operation of buildings, infrastructure and industrial projects.

    Impact: customers generally see 25-40% material or energy savings. In some cases this can be even higher. Autodesk plans to disclose more data around how clients use its products and the ‘simulated savings’ the company helps customers achieve on waste, energy and other sustainability metrics.

     

    Important Information
    For professional investors only – not for retail investors

    Risk factors you should consider before investing:
    • The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future results.
    • A concentrated portfolio may be more volatile and less liquid than a more broadly diversified one. The fund’s investments are concentrated in a particular country or sector.
    • Investing in China A shares involves special considerations and risks, including greater price volatility, a less developed regulatory and legal framework, exchange rate risk/controls, settlement, tax, quota, liquidity and regulatory risks.
    • The use of derivatives carries the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions, such as a failure amongst market participants. The use of derivatives may result in the fund being leveraged (where market exposure and thus the potential for loss by the fund exceeds the amount it has invested) and in these market conditions the effect of leverage will be to magnify losses.
    • The fund invests in equity and equity related securities. These are sensitive to variations in the stock markets which can be volatile and change substantially in short periods of time.
    • The fund invests in emerging market equities and / or bonds. Investing in emerging markets involves a greater risk of loss than investing in more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks.
    • Interpretation of ‘Impact Investing’ will vary according to beliefs and values. Consequently the fund may invest in companies which do not align with the personal views of any individual investor.
    • The fund may invest in companies with Variable Interest Entity (VIE) structures in order to gain exposure to industries with foreign ownership restrictions. There is a risk that investments in these structures may be adversely affected by changes in the legal and regulatory framework.
    To help you understand this fund and for a full explanation of risks and the overall risk profile of this fund and the shareclasses within it, please refer to the Key Investor Information Documents available in the local language, and Prospectus available in English, which are available on our website www.aberdeenstandard.com.The Prospectus also contains a glossary of key terms used in this document
    Investment objective: The Fund aims to generate growth over the long term by investing in equities which aim to create positive measurable environmental and/ or social impacts The Fund aims to outperform MSCI AC World Index (USD) benchmark before charges.
    The fund is a sub-fund of Aberdeen Standard SICAV III, a Luxembourg-domiciled UCITS fund, incorporated as a Société Anonyme and organized as a Société d’Investissement á Capital Variable (a “SICAV”).
    A summary of investor rights can be found in English on our website – www.aberdeenstandard.com/legal-notice.
    The information contained in this marketing material is intended to be of general interest only and should not be considered as an offer, investment recommendation or solicitation to deal in the shares of any securities or financial instruments. Subscriptions for shares in the fund may only be made on the basis of the latest prospectus, relevant Key Investor Information Document (KIID) and, in the case of UK investors, the Supplementary Information (SID) for the fund which provides additional information as well as the risks of investing. These may be obtained free of charge from the Fund Management company Aberdeen Standard Investments Luxembourg S.A. 35a, Avenue J.F. Kennedy, L-1855 Luxembourg or the local paying agents detailed below. All documents are also available on www.aberdeenstandard.com. Prospective investors should read the prospectus carefully before investing.
    Denmark, Finland, Iceland, Norway, Sweden:Issued by Aberdeen Standard Investments Luxembourg S.A. 35a, Avenue J.F. Kennedy, L-1855 Luxembourg. No.B27471. Authorised in Luxembourg and regulated by CSSF.
    DH ref: GB-021121-160334-1

    Image courtesy of JoBischPeuchet on Pixabay

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