Public Equity Impact Requires Rigorous Approach

    Stockholm (NordSIP) – The UN has estimated that annual investments of somewhere between $5 trillion and $7 trillion are needed to have any hope of achieving the Sustainable Development Goals (SDGs) by 2030.  This requires at the very least tripling current spending, something that can only be achieved by including both public and private sector investment. Given the sheer size of capital flows needed to support the SDGs, the investment industry is endeavouring to provide scalable impact investing vehicles focusing on the far larger listed securities markets.

    One of the private actors making a serious effort in this direction is Espiria Asset Management. NordSIP tuned in to the launch of a white paper on 23 February to learn more about the asset manager’s listed impact equity strategy. Portfolio Manager Huizi Zeng, the author of the paper, explained that impact measurement and management must not fall into the trap of assuming positive outcomes solely from the outputs of certain business activities or sectors.  She gave the example of directly linking the sale of renewable technology products with specific environmental impacts.  According to Zeng, positive outcome causality can only be determined by starting with each company’s stated intentions and working through an impact logic chain examining their business activities, outputs, related real world outcomes and measurable impacts.  This should be a closed loop, feeding data back into the start of the process to increase its accuracy over time.  Zeng also referred to the Theory of Change model that reverses this process to identify all the conditions that must be in place for certain desired impacts to occur.

    Providing a rigorous methodology that is supported by verifiable data is in place, Zeng believes that public equity is the asset class that can drive the expansion and democratisation of impact investing.  Once the preserve of less profit-driven investors such as foundations or development finance institutions, impact investing can begin satisfying pent-up mainstream investor demand by targeting the growing number of liquid, publicly listed companies with sustainability-driven strategies.  Zeng mentioned the generational change behind the growing proportion of investors that have explicit sustainability targets alongside their return expectations.  She believes demand still outstrips supply, despite the last couple of years having seen larger players launching listed impact equity strategies on the market.

    The 17 SDGs cover a very broad, sometimes overlapping range of development areas broken down into 169 underlying targets.  While not all of these are directly investable, the targets provide a common language on which to base impact investment strategies. As explored in two other whitepapers recently, private equity and private debt are the preferred asset classes that afford investors access to smaller scale, innovative businesses where positive outcomes can be accurately measured and attributed to specific investments.  However, they lack the scale necessary to solve a problem of the current magnitude.

    Implementing genuine, measurable impact investing methodologies across a range of asset classes is challenging, as witnessed by many of the investors and asset managers NordSIP interviewed in the Impact Investing Handbook 2021.  While listed equity impact strategies target different environmental and social outcomes, a consensus appears to be emerging among asset managers regarding the rigour and discipline needed to avoid accusations of “impact washing”.

    Zeng believes the future is bright for listed impact equity investing, based on her view that “an increasing number of listed companies are aligning or realigning their businesses with material sustainability goals”. NordSIP will continue watching for developments in this asset class as managers take advantage of this growing hunting ground.

    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.

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