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For many investors, the need to align the three Ps – planet, people and profit – has never been felt more acutely. As the calls from COP26 for private capital to be put to work to address the climate crisis continue to reverberate, we turn the spotlight on how investors can drive positive impact in 2022 and beyond. Impact Investing in Focus 2022 showcases the strength of leading managers in this space – where are they finding opportunities to drive real-world outcomes for all stakeholders? How are intermediaries approaching impact investing? And what sort of outcomes – for the planet, people and profit – can investors expect?
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Jennifer Hill speaks to asset managers about impact investing trends as some mature and others emerge Some impact investing trends such as renewable energy have been around for a while; others, such as helping the vulnerable in society, are comparatively new. Old or new, trends can have great influence on the planet, people – and profits. ‘Trends are like glaciers: powerful but slow moving,’ says Mike Fox, head of sustainable investments at Royal London Asset Management. ‘Investment markets are like rivers: fast moving and ever changing. Investors are much better hitching a ride on a glacier than getting swept away by a river, which is why spotting trends early is important. If done correctly they can lead to years of growth for the companies benefiting from them.’ Decarbonisation The renewable energy sector has grown rapidly over the past decade, already attracting billions in investment from governments, developers and financial institutions. Current estimates state that $130tn (£103tn) of investment is needed to achieve global net-zero emissions by 2050. ‘As clean energy momentum grows, the ability of power grids to deliver efficient and safe transition to net zero is increasingly in the spotlight,’ says Shuen Chan, head of ESG at LGIM Real Assets. ‘Investments in smart-grid capacity and flexibility through substation sensors, AI and smart metering as well as the right types and amounts of storage will be crucial in underpinning the energy transition,’ she adds.
Fox sees the decarbonisation debate rapidly extending from the energy sector alone to others such as agriculture and construction, which are much earlier on in their decarbonisation agenda. ‘Look for companies helping to replace animal-based protein with plant-based, and for chemical companies reducing the carbon embedded in construction,’ he says. Sustainable food chains Global food chains need to innovate for the world to mitigate climate change. Over time, the equity market will reward companies facilitating these changes, says Steve Smith, a European equities fund manager at Invesco. He owns companies that are innovating across three components of the food chain: production, processing and distribution. ‘To become more sustainable, farmers need to change farming practices, food processors need to offer more sustainable products and supermarket chains need to get involved in the food industry revolution,’ says Smith. Smith owns Yara International, which produces premium fertilisers that can increase yields and be produced from green ammonia, therefore having a materially lower carbon footprint. Also in his repertoire are equipment supplier GEA – seen as a key enabler for food processors to innovate into plant-based food alternatives – and retail names Ahold Delhaize and Carrefour, which have committed to offering healthier options, improving product transparency, eliminating waste and reducing emissions. Sustainable agriculture and land ecosystems is one of six core themes in the Jupiter Ecology fund. Companies owned operate in the areas of precision agriculture and alternative protein, from plant-based meat and dairy to cultivated meat. Supporting societies More impact funds are seeking to address entrenched social issues. Across the UK, homelessness is at critical levels: one million households are on social housing waiting lists and 100,000 households live in temporary accommodation. Social-impact investment company Resonance puts the cost of addressing the latter at £20bn. ‘Women’s homelessness is often a different experience than that of men, often hidden, rooted in trauma and violence, requiring a gendered solution that is often best delivered by women’s sector organisations,’ says Simon Chisholm, Resonance's chief investment officer. Resonance and Patron Capital’s Women in Safe Homes fund works alongside charity partners to provide women with specialist support and aims to house 6,000 women over its lifetime. The bond market is also stepping up to support vulnerable and disadvantaged people. ‘With the tragic events in Ukraine, we’ve witnessed huge displacements of refugees,’ says Simon Bond, manager of Columbia Threadneedle’s social bond strategies. ‘The recent bond issue of the Council of Europe Development Bank to bolster the response to the crisis demonstrates how, through bonds, we can follow the use of proceeds and direct capital to a specific issue impacting communities.’
Mike Fox Head of sustainable investments at Royal London Asset Management
Challenge 1: Make policies more uniform ‘In the absence of uniform policies, you end up creating an uneven playing field in different types of markets,’ Clarke says. ‘Looking at more universally applied regulations and policies goes a long way in raising all boats and tackling the thorny issues we face around application inconsistencies.’
Damian Payiatakis Barclays
More impact funds are seeking to address entrenched social issues
It is not just the pandemic that has fuelled the uptake of impact investing. Payiatakis attributes much of it to David Attenborough’s popular BBC wildlife documentary series Blue Planet. ‘That documentary was one of the starting points because it sparked more interest in the area. All of a sudden people began to connect their wealth with the outcomes it generates. Over the last two years, this trend has only accelerated.’ The numbers speak for themselves. In a survey last year of more than 3,000 investors by US asset manager American Century, about half of US and UK investors said they found the concept of impact investing appealing. There are challenges, though. Impact investing may be on the road to mainstream adoption, but that road is riddled with potholes. Regulation, or rather the lack of it, is one thing that makes the lives of people like Tribe Impact Capital’s Kooij and Clarke harder.
in the US
51%
in the UK
48%
Challenge 2: Ensure data is more transparent Rating agencies also need to step up their game and become more transparent about their data-evaluation process. ‘There’s a risk that capital flows into ESG funds and names that are actually contributing to the problems we’re currently facing,’ Clarke says. ‘Issues with data coverage, accuracy, timeliness and verification are huge, so it’s quite difficult for investors to get a handle on the topic.’
Challenge 3: Beware marketing spin As an increasing number of asset managers are eager to get a piece of the action, finding high-quality investment opportunities in the impact-investing space is no mean feat. The generous interpretation of the term itself doesn’t help either. ‘The earliest adopters were clear about what they were doing, their ambition and the thought they were putting into it. Now it’s easier for them to say: “We’re already doing some renewable energy – let’s call it impact and go from there,”’ Payiatakis says. As frustrating as the marketing spin is, it shows that impact investments are becoming an inherent part of portfolios. As Impact Investing Institute’s Gordon puts it: ‘The market moves when there’s appetite for it. I don’t want to give too rose-tinted a view, but the money is going into ESG and impact strategies. It’s not going into oil companies.’
Look for companies helping to replace animal-based protein with plant-based, and for chemical companies reducing the carbon embedded in construction
Simon Bond Manager of Columbia Threadneedle’s social bond strategies
The recent bond issue of the Council of Europe Development Bank to bolster the response to the crisis demonstrates how, through bonds, we can follow the use of proceeds and direct capital to a specific issue impacting communities
Time is running out if we are to hit net zero by 2050: could green bonds provide the solution? Released in April, the IPCC’s WG3 report focused on current efforts to mitigate climate change. It highlighted the fact that greenhouse gas emissions have continued to increase in the last decade, concluding that current climate pledges are not ambitious enough to cap warming at 1.5C – and that even 2C might be challenging. As a recent report by the Climate Bonds Initiative (CBI) spelled out, ‘Scenarios in line with a net-zero-by-2050 future all require substantial action in this decade, including winding down fossil fuel use and the complete phase-out of unabated coal-fired power. Carbon dioxide removal is also seen as crucial.’
Louisiana Salge Senior sustainability specialist, EQ Investors
Public spending on green infrastructure has been promised, but private capital can help accelerate the green transition
Against this backdrop, it was notable that green bond issuance for the first quarter of 2022 was subdued, perhaps because of the turbulent market environment. Issuance for the quarter totalled $83.5bn – down 38% compared to Q1 2021. Nevertheless, CBI still sees the green bond market as being on track to reach $1tn by the end of 2022. ‘The transition of all economic sectors and activities requires accelerating investments in green and transition/interim activities and technologies,’ its Q1 2022 update notes. At the same time, the invasion of Ukraine has meant an increased focus on energy security, particularly in Europe, which is also likely to fuel renewable investment and boost green bond issuance. ‘Accelerating the energy transition with early decommissioning of carbon intensive energy sources coupled with the uptake of renewables, which are already cheaper than natural gas at scale, can strengthen energy security while maintaining Europe’s course towards its environmental targets,’ CBI noted.
One area of growth in issuance has been emerging markets, where volumes were up 4% from Q1 2021, to $26.5bn. And within this, a significant development was the first sovereign sustainability-linked bond (SLB): these instruments allow entities to access sustainable finance that is not tied to specific projects or assets, but can help define and signal to investors their overall transition pathways. Chile made headlines in March for issuing the first-ever sovereign SLB, which will help it reach its Paris Agreement target of a 50% share of renewables by 2028. One wealth manager to use green bonds in its impact portfolios is EQ Investors. ‘Public spending on green infrastructure has been promised, but private capital can help accelerate the green transition,’ said Louisiana Salge, senior sustainability specialist at EQ. She noted that emerging markets are still heavily dependent on thermal coal – the most carbon intensive fuel – and have the highest forecast growth in energy demand due to rising incomes and populations. ‘Green bond proceeds can help finance affordable green electricity,’ she said. EQ invests via the Amundi Emerging Market Green Bond fund. Within that fund, Salge highlighted an investment in ReNew Power, an independent power producer in India that is solely focused on harnessing solar and wind energy and helping to deliver on the Indian government’s plan to expand its renewable energy capacity nine times by 2030.
Green bond markets set to reach USD1tn by end of 2022
Corporations and funds are under greater expectation to do more Impact investing has become increasingly fashionable in recent years as investors seek to use their financial clout to achieve tangible change – either by encouraging companies to achieve net-zero emissions goals or avoiding so-called ‘sin stocks’ such as tobacco or gambling companies. As a result, more and more companies, fund managers and funds are producing impact reports, which utilise a whole variety of metrics to illustrate their purported positive environmental and social outcomes. Amy Clarke, chief impact officer at wealth management firm Tribe Impact Capital, says that the trend towards impact reports has been driven by a combination of investor pressure and growing scrutiny from non-governmental organisations regulators. With new standards such as the Sustainable Finance Disclosure Regulation being introduced, corporations and funds alike are under greater expectation to do more. ‘What has been a pressure point for companies for some time is now catching up with fund managers as they need to match action with rhetoric,’ she says. ‘With developments now on the horizon with the International Sustainability Standards Boards, we’re moving to a new world of disclosure.’ But at the same time, the sheer number of techniques and methodologies for measuring impact mean that impact reports can often be highly opaque, especially for managers attempting to align investments with their clients’ values. Clarke says that investors need to be mindful that there is a key difference between output measure and true measures of impact. It typically takes a multi-year analysis approach to understand the full scope of the impacts and value added by a company’s decisions. 'As an example, let’s say a company is able to create an additional 250 jobs through your investment,' she says. 'It might look good, but is it? An impact measure takes into account where those jobs are, at what level and pay grade, who was employed, what social issues may have been tackled as a result of that employment, and what that employment has ultimately led to in terms of social, environmental and economic value-add.'
It is far better to drive change from the inside by having open and honest conversations with senior management and the board than to walk away and immediately lose any leverage for change
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This assumes climate policies are introduced early and become gradually more stringent. Both physical and transition risks are relatively subdued
This assumes policies are introduced late, are delayed or are divergent across countries and sectors. There is a higher transition risk
Cimate policies are implemented in some jurisdictions but are insufficient to halt significant global warming. This results in greater physical risk from, for example, extreme flooding, which will seriously affect GDP
Q1 2020
£47.1bn
£108.7bn
Q1 2021
Social bonds had a record quarter in Q1 2021, with a total issuance of £68.2bn. This was driven by the need to finance the Covid crisis and post-pandemic recovery.
£108.7bn of green bonds were issued in Q1 2021. This is up from £47.1bn in Q1 2020.
£68.2bn
£31.2bn
total social bonds market
EU
The largest social bond issuer was the EU, with five issuances totalling £31.2bn and accounting for 45% of the total social bonds market.
Source: Network for Greening the Financial System
Source: SEB
1 EJ = Energy of 1 quintillion joules Source: IIASA NGFS Climate Scenarios Database, MESSAGE model.
Primary energy (downscaled) - net zero 2050
Denmark
Chile
Philippines
Nigeria
Clarke feels that the so-called ‘Double D’ approach of dynamic and double materiality is critical for investors to assess whether an impact report contains sufficient information. Dynamic materiality reflects the shifting nature of the issues that companies face or are creating, while double materiality is the recognition that financial risk reporting typically focus on the risks that face the business, not the risks the business is creating. Impact investors say that while a lot of financial reporting focuses on impact alpha, as a measure of how successful a company has been in making money for itself; metrics that look at impact beta are in many ways more relevant. This is because the activity of some companies actively increases market volatility by collectively adding to exogenous shocks such as the climate crisis. However one of the limitations of the industry at present is that many such metrics are not currently available. 'The brutal reality is that the industry is a long way off being able to do this because reporting regimes don’t allow for this type of data to be disclosed currently,' says Clarke. 'As a result, the mapping of true impact becomes extraordinarily difficult.' Because of the complex and often subjective nature of impact metrics, there is a rising danger of corporate greenwashing when it comes to impact reports. As a result, many feel there is a need for greater standards or frameworks to ensure that data presented is robust and valid. 'Given financial data is subject to this level of enhanced due diligence there’s a strong argument that extra financial information should be subject to the same level of rigour,' says Clarke. 'This approach, sitting alongside unified reporting standards and regulatory frameworks, should go a long way to creating a more level playing field where investees and investors ultimately have higher levels of trust in what they’re being told.'
How do wealth managers approach impact investing? What role does it play in their portfolios and where do they see the greatest opportunities? Jennifer Hill spoke to four of them
The ethical investor
The moderate investor
The active investor
The innovative investor
If your client wants their investment portfolio to reflect their strongly held values and beliefs, consider ethical or values-based investing. Some of these funds were originally faith-based and have their roots in religious movements. Others are broader. They will typically use negative screening to remove companies in industries that might be viewed as objectionable from an ethical or moral perspective. They might screen out companies associated with alcohol, tobacco, gambling, pornography, animal testing, weapons and nuclear power, for example. This type of investing is typically quite personalised, as everyone’s moral compass is calibrated differently. What is acceptable to one investor might not be to another.
If your client requires their investments to stick closely to traditional benchmarks but they are happy to screen out the most unsustainable companies, consider an ‘ESG lite’ approach. By investing in the world’s largest companies, there will be some compromises on ESG issues. These companies will not score highly on every factor, although there is a great deal changing, especially since the pandemic. A moderate approach uses negative screening to avoid companies with the lowest ESG scores. This strategy lends itself to investing in less expensive ESG-themed ETFs and index trackers.
If your client wants to choose companies that rank as the most sustainable according to ESG metrics, as opposed to excluding the ones that rank lowest, positive screening could be the best approach. ESG strategies using positive screening seek out companies that are the best in class and score highly on a range of different ESG metrics, including environmental impact, treatment of workers and business ethics. They also use negative screening to exclude companies with the lowest ESG scoring from their investment universe.
If your client wants their investments to support companies creating solutions to world problems, impact investing could be the strategy to follow. The aim of impact investing is to make a positive and measurable impact on society or the environment, as well as generating a financial return. Some impact investing focuses on funding specific projects, such as microfinance funds to create affordable housing, or green bonds to raise money for a clean water initiative. This may mean the portfolio is more concentrated, and there is a good chance it is riskier too. Investors in this space need to be willing to accept more risk and less diversification.
Amy Clarke Tribe Impact Capital
If a company says it is providing 5,000 books to schoolchildren in the UK, on the face of it that sounds great. But the questions go much deeper
BEN YEARSLEY CO-FOUNDER, FAIRVIEW INVESTING ‘It still isn’t a huge part of portfolios. We’re adding more sustainability but not impact yet. It’s still the preserve of those who ask for it.’ One obstacle to adoption across the industry, certainly among clients and possibly the investment community, is uncertainty over the difference between ethical, sustainable, impact and green strategies. Yearsley is keen, however, to add sustainable funds to mainstream portfolios. ‘Firstly, it starts to future-proof portfolios. Secondly, if – in a few years’ time – clients ask about their portfolios’ sustainability, I can point to it already being there.’ He uses First Sentier Responsible Listed Infrastructure as a core holding across virtually every client portfolio. ‘It’s got 80% crossover with First Sentier’s original infrastructure fund and is managed by the same team, yet it’s sustainable – and I had access to the cheaper founder share class.’
PATRICK THOMAS HEAD OF ESG, CANACCORD GENUITY WEALTH MANAGEMENT Canaccord Genuity Wealth Management’s approach to impact investing is to think about impact as a corollary of exponential growth. ‘The companies that help to ameliorate global sustainability challenges are extremely rare, and identifying those companies that will have a real impact isn’t easy,’ says Patrick Thomas. He reckons a sensible way to target impactful companies is through specialist thematic funds investing in areas including clean energy, green transport and sustainable food production. The Russia-Ukraine war has thrust the latter in the spotlight. ‘It’s shown us that Ukraine is the world’s breadbasket – and we really need more breadbaskets. ‘We already have 800 million people subsisting on fewer than 1,200 calories a day – there is a real risk of famine in emerging economies.’ To access the theme he uses the Pictet Nutrition fund and the Rize Sustainable Future of Food ETF.
SHANNON LANCASTER ANALYST, RAVENSCROFT Ravenscroft sees the greatest opportunity in niche thematic funds. Oncology and water funds offer a unique diversifier. ‘There are incredible innovative businesses that could change the lives of future generations and they need investment. ‘A fund that selects stocks in a fundamental, bottom-up manner will be able to pick the strongest small players.’ The firm is particularly excited about oncology funds, such as Candriam Equities L Oncology Impact, that invest in listed companies developing or selling services for the treatment of cancer. ‘They invest in companies whose products make a difference to patients in the diagnosis, profiling and treatment of cancer – companies that show innovation in surgery, radiation and oncology drugs,’ she says. ‘Some of the most common cancers have high recovery rates if detected early, so early diagnosis is a global benefit that will have a positive impact on many lives.’
BEN YEARSLEY FAIRVIEW INVESTING ‘It still isn’t a huge part of portfolios,’ says Ben Yearsley, cofounder of Fairview Investing. ‘We’re adding more sustainability but not impact yet. It’s still the preserve of those who ask for it.’ One obstacle to adoption across the industry, certainly among clients and possibly the investment community, is uncertainty over the difference between ethical, sustainable, impact and green strategies. Yearsley is keen, however, to add sustainable funds to even mainstream portfolios. ‘Firstly, it starts to future-proof portfolios. Secondly, if in a few years’ time clients ask about their portfolios’ sustainability, I can point to it already being there.’ He uses First Sentier Responsible Listed Infrastructure as a core holding across virtually every client portfolio. ‘It’s got 80% crossover with First Sentier’s original infrastructure fund and is managed by the same team, yet it’s sustainable – and I had access to the cheaper founder share class.’
ISABEL KWOK INVESTMENT MANAGER, JM FINN When it comes to impact investing, the main concern of Isabel Kwok is that the data being reported is accurate and comparable with the broader market. Equally important is the direction of travel. ‘To really be meaningful, we need to see the figures improve year-on-year,’ she says. ‘This is likely to pose a challenge to some funds already reporting carbon emissions, for example, especially at the scope-3 level, where data is notoriously difficult to obtain. We may even see some investments initially go backwards as data becomes more accurate.’ JM Finn has a team dedicated to sourcing specialist funds. Its preferred list includes those that provide direct positive environmental and social impact. Among them is the Threadneedle UK Social Bond fund, which seeks to address social inequality and maps its impact against the UN’s Sustainable Development Goals.
Since AXA IM launched its Clean Economy strategy in 2018, governments, corporates, and consumers alike have continued to accelerate their demand for, and commitment to, solutions that can help build a more sustainable future. Portfolio Manager Amanda O’Toole explains how it is certainly possible to secure long-term growth in high quality businesses which are associated with that theme, while simultaneously delivering a positive and measurable impact on the environment.
What is impact investing? Impact investing is a very targeted approach to tackling the world’s biggest social and environmental challenges while simultaneously delivering financial returns. Impact investment strategies help to address the challenges facing our global society by providing capital to effective solutions and to supporting businesses which are committed to transitioning to a more sustainable future. This differs from other forms of responsible investing as capital is directed towards positive solutions to drive change, harnessing this potential to achieve both financial and non-financial (i.e. environmental or societal) returns. In contrast, other forms of responsible investing typically exclude or mitigate risks associated with environmental, social and governance (ESG) characteristics when selecting stocks. What is the Clean Economy? Consumers are demanding more from businesses and governments as concerns over the sustainability of human civilisation on earth deepen. Consequently, we are seeing the growth of Clean Tech investing, as more companies embrace the circular economy and respond to the need for change. Clean technologies are creating real solutions to help address the pressure on scarce natural resources and the need for greenhouse gas emission reduction. The ‘Clean Economy’ is the rapidly growing universe of companies whose activities improve the sustainability of resources, contribute to the energy transition or address the problem of water scarcity. AXA IM’s Clean Economy strategy only invests in companies which demonstrably generate a share of their revenues from the clean economy through an investment approach combining fundamental stock selection with a proprietary impact framework and a focus on UN Sustainable Development Goals. Which sustainability topics is the strategy aiming to address? Climate change is no longer a problem for the future, it is already creating challenges in almost every part of our lives today. From how we transport people and goods around the world, how we source energy to power the economy, how we feed our growing population, to how we manage the fixed supply of scare resources. The companies that can create solutions to these problems recognise that there are decades of growing demand ahead for their technologies and potential future innovations. The investment process of AXA IM’s Clean Economy strategy identifies the best potential investment opportunities among these companies across four key areas: low carbon transport, smart energy, agriculture and food industry, and natural resource preservation. How do you measure impact? To understand and measure the non-financial performance of a company, using an impact framework to assess a company is crucial. Our team of in-house impact analysts use our proprietary impact framework to drill down into the specifics of every company we invest in. This allows us to provide tangible and comprehensive reporting on the real impact that our investments are making towards specific UN SDGs, aligned to the four key areas outlined above. Clients increasingly want to be assured that their investments are making a meaningful difference towards a more sustainable future, not just checking ESG boxes. For more information visit
Amanda O’Toole Portfolio Manager
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Impact achieved by capital deployed As well as producing company-level impact, our database allows us to report on the impact of our Fund’s assets under management. Put simply, we scale the metrics to demonstrate the impact accomplished through the capital we deploy – approximately $450m as at 31 December 2020 – on behalf of our clients, thereby reflecting our ownership of each company held in our Fund. Highlights include:
Source: Federated Hermes, as at 31 December 2019. Note: The Impact Opportunities portfolio has been harmonised for calendar year impact.
Read the full report here or visit the new Federated Hermes sustainability hub to access more in-depth analysis, research and commentary on sustainability, direct from our investment teams. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results.
As it stands, the database calculates the impact our portfolio had in the calendar year 2019. We are in the process of rolling this analysis forward to calculate impact for the calendar year 2020, as each of our investee companies start to publish their annual earnings and sustainability reports. We expect to be able to report to clients on the 2020 impact of our portfolio by the end of June.
Once each of our investee companies publish their annual earnings and sustainability reports, we will be able to update our figures to reflect 2020.
Clean Economy | Investing in Clean Technology | AXA IM UK (axa-im.co.uk)
This might be the opportunity to reset and make the kind of intuitional changes and policy choices that will lead to a better, greener and more sustainable future
Abbie Llewellyn-Waters Head of sustainable investing
The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Past performance is no guide to the future. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM. This document contains information based on the MSCI All Country World index. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. 27688.
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Abbie Llewellyn-Waters, head of sustainable investing, reflects how her and her team’s emphasis on high-quality companies that are committed to a sustainable future is more essential than ever as the Global Sustainable Equities strategy marks its three-year anniversary. With the Covid-19 crisis continuing to grip the world, she takes stock of the period that witnessed turbulence on many fronts from climate crisis to deep social inequality, and analyses emerging issues, opportunities and what the future holds. SinceThe landscape for sustainable investments has undergone a seismic shift since we launched our Global Sustainable Equities strategy in 2018. The defiance of Extinction Rebellion and the bravery of #metoo triggered initial movement in awareness and action on planet and people. We launched our strategy just as David Attenborough’s footage of an albatross feeding plastic to its young provoked a moral moratorium on single use plastic across the world. Greta Thunberg soon became a household name with her sustained campaign on global warming. For more than a year now, the world has been grappling with coronavirus. The most marginalised have borne the heaviest toll, both in terms of fatalities as well as economic effect through job loss and hardship. Within this social emergency, the chilling murder of George Floyd triggered Black Lives Matter protests across the globe. Climate crisis And in the last three years, geopolitical fault lines between the East and West have deepened with the US and China engaged in a trade war and tensions with Russia simmering. Closer to home, the United Kingdom exited the European Union, creating a more boisterous narrative of protectionism. Stark images of koalas clinging to burning bushes, wild fires in the Arctic circle, severe droughts in sub-tropical Taiwan and a deep freeze in Texas have made world leaders sit up and take notice. They have begun to understand that climate change is fast becoming relevant to both the four year democratic cycle and economic resilience. The U.S., the world’s second largest carbon emitter, returned to the Paris climate accord as Biden undid his predecessors’ decision to withdraw. Immediately, his team started working with China, the two largest emitters co-operating to tackle the climate crisis. Transparency In 2018, the Intergovernmental Panel on Climate Change released its highly influential Special Report on Climate Change, highlighting the advantages of keeping global temperature increases to just 1.5 degrees above pre-industrial levels. Recognizing that huge transformations in technology and behaviour are required, governments and companies alike have subsequently been making commitments to achieve net zero carbon emissions by 2050. The degree of regulatory, legislative and commercial alignment is unprecedented from a climate change perspective. All eyes are now on the UN Climate Change Conference (COP26), although doubts persist on whether event scheduled to be held in Glasgow in November 2021 will meet the timeline. Addressing biodiversity and natural capital loss is also rapidly moving up the political ad social agenda. Over half of global GDP is substantially reliant on natural ecosystems, which are being depleted. There is increased scrutiny on what companies say and do now in terms of sustainability and regulators in the US, Europe and the UK now require higher disclosures. Planet, people, profit Our view is that gender equality is under-represented in the ESG discourse. To understand whether or not companies are enabling inclusivity, we go beyond representation of women in leadership positions to consider the policies that enable both retention and attraction of women in the workforce. Recent data suggests that progress on the rate of women’s participation rate in the workforce has reversed by decades due to the pandemic. If anything, the last three years have amplified and accelerated our philosophy that we need to balance the interests of three key stakeholders: the planet, on which we all live, people, with whom we all co-exist and profit that we require from our savings. Our investment framework looks to identify high quality companies that are leading the transition to a more sustainable world. Our Global Sustainable Equity strategy stayed resilient through the period. We focus on both the sustainability of what a company sells and how it behaves. Centring our fundamental investment research on the issues our expertise tells us are most material to each company, we avoid blanket scoring hundreds of data points to decide whether a company is good or bad. Decades of commitment Jupiter as an investment house has also continued its decades of commitment to responsible management in the context of broader stakeholders. By having a dedicated team that has spent their entire careers specialising in sustainable outcomes we are well positioned to navigate this increasingly complex space as we seek to offer a diversified and liquid alternative to global equities. We also don’t just say we do it, we go to great lengths to evidence the broader returns we generate in our Annual Impact Report. Running a low carbon portfolio is fundamental to investment returns as in the coming years, companies will have to start paying for the carbon that they produce. This will happen both through reduced cash flows as carbon taxation mechanisms kick in and increased costs of financing as higher carbon businesses are deemed riskier by the financial markets. By preparing for internalisation of costs early our holdings should have a competitive advantage over their higher carbon peers, supporting the returns of the portfolio. Sustainability frameworks For our clients, investing their savings into a decarbonized portfolio, with a focus on inclusivity, we have positioned our fund at the forefront of this transition. We sense check our conclusion with currently available sustainable frameworks, including the UN Sustainable Development Goals, the temperature goals of the Paris Agreement and the UN Global Compact. We report on all of these in our Annual Impact Report. The UN and the World Bank have warned the pandemic has undone decades of work to reduce inequalities, pushing millions around the world into extreme poverty. To combat this, interest rates are being held at historic lows. Government debt levels across the world are at or near levels not seen since World War Two, raising the importance of building back a better, fairer economic system as generations face the consequences of repaying this debt in the future. As we continue to navigate the coronavirus crises, the importance of investing in high-quality, resilient and forward-thinking companies leading the transition to a more sustainable world is more imperative than ever.
Myth 2 – It involves more investment risk All investments carry the chance of losses, of course, but the risks always relate to what it is you’re investing in. There’s no obvious reason why investing for impact would necessarily mean your money is at greater risk than other investment approaches. A misconception might be that all impactful companies are start-ups with big dreams and no profits – the archetypal high risk investment. Of course, smaller companies developing new technologies will play an essential part if we are to overcome many of the world’s biggest challenges. But, large industry-leading companies – often more stable, lower risk investments – can have a terrific positive impact on society or the environment, by virtue of their size. Incremental steps like more efficient processes can have a transformational effect when taken at scale. Businesses which spearhead and normalise positive impacts in their industries can play a leadership role that galvanises wider long-term impact initiatives among their peers. Companies can also play an enabling role by providing the tools, like software or technology, that makes it possible for others to deliver positive change.
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Myth 3 – It’s wishy-washy An accusation sometimes aimed at impact investing is that it might lack the analytical discipline of traditional approaches. Admittedly, being a relatively young discipline there can be a lack of common standards, but this does not mean there is lack of rigour. Applying an effective framework provides more than a clear conscience. If successful, it can offer a repeatable process to manage risks and identify impact investment opportunities. As well as assessing the impact that a company has through its activities, we can attempt to gauge the extent to which companies explicitly and genuinely intend to address a problem facing society or the environment. Critically, this analysis of impact and intentionality should be alongside – not instead of – analysis of the investment case.
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Myth 4 – You can’t measure impact Admittedly, measuring impact is not as black-and-white as measuring financial returns. But that does not mean it's impossible to do in a meaningful way. The UN Sustainable Development Goals (SDGs), which articulate the world’s most pressing environmental and societal challenges, are a useful – and universal – reference point for impact investors. Since these are, arguably, the issues that matter most for people and the planet, companies that contribute towards achieving them can be judged to have a positive impact. To gauge the extent of this impact, we can determine key indicators of performance that align to a specific SDG. These will be relevant to the activities of a business. So, for instance, we might measure the impact of a renewable energy company in terms of carbon emissions saved. By measuring performance over time, we can gauge a company’s progress towards realising the SDGs.
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Myth 5 – You can’t make a difference When it comes to investing in listed company shares, the difference we make through our investment – known as the “additionality” – can be understood by considering the impact made by the company we invest in. To evidence additionality, we might ask how the world would be different if that particular company did not exist and consider if it has some technological know-how or impact footprint that would be hard for a new company to replicate. As shareholders owning a percentage of the company, investors can play a role in delivering that positive impact. While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them. The views expressed here should not be taken as a recommendation, advice or forecast. The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.
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Myth 1 – Investing for impact means compromising returns Of course, there can be no guarantees when it comes to returns from investing, but there is no evidence that impact investing leads to lower financial returns over the long run. When the pursuit of financial returns is given the same priority as finding positive impacts, this should be little surprise. After all, why shouldn’t a company and its shareholders enjoy financial success if it delivers positive societal benefits through its business? The two goals can – and should – go hand in hand. There are clearly multi-billion-dollar opportunities for innovative companies that can successfully deliver solutions to the challenges facing society and the planet, such as global warming and access to education. Moreover, companies that make positive impacts should be on the right side of stricter future regulations and the trend towards more conscious consumerism.
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Investing for impact is not only truly exciting, it also has terrific potential to address some of the world’s greatest challenges. It would therefore be a shame if its growth was held back by common misconceptions. Their genesis is arguably the notion that impact investment is about putting money to work to do good, rather than to turn a profit – a form of charity, in other words. This is not so, of course. The aim of impact investments is to achieve a social or environmental purpose alongside financial gains – not instead of them. Here are five of the most common myths about impact investing that need to be dispelled.
What does the current volatility mean for energy transition investing? In 2020 we joined Regnan, the sustainable and impact investment arm of J O Hambro Capital Management, as the Equity Impact Solutions team, the first equity investment team at Regnan. Although a new name to many UK and European investors, Regnan is a familiar and respected name in responsible investment circles. With over 25 years’ experience in stewardship services, Regnan began life as an Australian academic think-tank in 1996. Regnan’s expertise extends well beyond ESG integration and has provided industry-defining stewardship services to leading global financial institutions and advised industry bodies such as the UN’s Principles of Responsible Investment (PRI), recently co-authoring ‘Active Ownership 2.0: The Evolution Stewardship Urgently Needs”. The broader resources of Regnan span stewardship services such as engagement, advisory and research, including in-depth study of particular solutions and broader themes. This leading research helps us to continually expand and deepen our understanding of the best solutions to meet the challenges represented by the UN SDGs. How long will the current macroeconomic environment last and what are the biggest risks facing investors? Stepping back from the specific issues mentioned above, we think investors are concerned about the risk of a systemic shift in the predominant macroeconomic regime. That is, with higher inflation and a slowdown in economic growth, now more likely than not. Our current baseline expectation is that while inflation will likely ease over time from the extended levels today, there is a very real risk that it could take more time than expected to ease, remain higher than before and be more volatile in the time to come. Although we are still some way from heading back to a 1970s-style inflationary regime, we do think a potential inflationary regime shift may have started to occur. We are concerned that this inflation could also result in a slowdown in growth – creating a more stagflationary environment where supply chain pressures on earnings may remain for a period. Does the current environment offer any opportunities? Despite the clear risks associated with the current environment, we strongly believe that there are substantial opportunities too. We must also not forget the enormous investment opportunity behind the energy transition or the potential for energy transition technologies to help solve many of the issues facing the world today. The renewed interest in energy security (in addition to our broad decarbonisation goals), further supports the need for the build-out of local, abundant, cheap, clean energy supplies around the world. The driving forces behind the energy transition remain as strong as ever and the current market environment has only enhanced these long-term structural trends. Over the next 30 years, we expect more than $100 trillion to be spent on achieving the transition to a more sustainable energy system, with even more to be spent on making the economy more sustainable. This spending will create the potential for a significant and structural 30-year increase in earnings growth for companies across the energy transition sector. This structural growth could be quite attractive during an economic slowdown. Moreover, if a more persistent inflationary regime were to emerge, the size and sustainability of potential earnings growth over time may outweigh any valuation de-rating when considering wealth preservation over the long run. Finally, cheap, clean, abundant renewable energy could be a very powerful solution to reducing energy dependence on Russia, creating an opportunity to remove one of Russia’s more powerful diplomatic threats. By accelerating the uptake of renewables, and particularly wind and solar which are produced using resources that are available in every country, there is a real tool to drive higher energy equality and perhaps help to reduce inflationary pressures too. Indeed, the wider realisation of this opportunity has fuelled the recent surge in valuations in the space. There are lots of positives about energy transition equities in the current market environment, which should not be overlooked by being overly focused on the threats. Given the very strong long-term opportunities, is now a sensible time to invest? Although we still see risks to the earnings and valuations of energy transition stocks in the current environment, we also firmly believe there are also exciting opportunities for stronger structural growth too. Valuations have also clearly re-set quite substantially from the Q4 2020 highs – and are now back to mid-2020 levels. Energy transition shares aren’t cheap yet (they are still sat just above the three-year trailing mean), but they are certainly much more fairly priced than they were at the start of 2021. Given that the valuations are fair (and not necessarily cheap yet), there is of course scope that valuations fall further. We cannot predict when performance will turn around – and there are definitely near-term threats that we must be aware of. However, the long-term picture remains very robust and exciting (and has not really changed over the last year) and so we do think now is a good time to at least be looking at the sector again given the long-term opportunity ahead. In the short-term, there is certainly a material risk of de-rating across most parts of the energy transition space. Equities across the wider market, including some in the energy transition space, remain richly valued on most measures compared to their historic range, and with central banks tightening, the era of cheap money may be coming to an end. However, for those investors willing to hold-on through the near-term pain and use weakness as an opportunity to further build exposure in this structurally growing space, the longer-term returns projection may look very appealing indeed.
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Audrey Ryan Support manager, Aegon Global Sustainable Equity Fund
We believe that fixed income markets present exciting opportunities to create meaningful real-world change. Recent events highlight the mounting challenges facing society. From the pandemic, which underscored the widespread need for improved health care and internet access; to the ambitious goals set at the UN Climate Change Conference (COP26); to Russia’s tragic invasion of Ukraine, which has led to a cascade of social and environmental problems and a sharpened focus on cybersecurity and renewable energy. As the world’s large challenges mount, investors are seeking ways to make a difference, increasingly turning to public markets as a means of using their capital to “do good”. With impact investing, investors can participate in a market that offers the potential for long-term growth, competitive investment returns, and opportunities to create positive real-world change. At Wellington, we take a non-concessionary approach, aiming to maximise impact and deliver competitive investment returns for our clients. In our view, selectively investing in what we believe are strong companies that stand out as addressing impact themes offers compelling return opportunities.
A diverse universe In public fixed income markets, our impact universe includes traditional issuers addressing critical needs through their core products and services and a subset of “sustainable debt” issuance, including green bonds, social bonds, sustainable bonds, and sustainability-linked bonds. This market is expanding quickly, as is the flow of capital targeting solutions for these needs. Opportunities to generate impact in fixed income markets are plentiful. We invest across the fixed income spectrum, providing capital to companies and organisations which address at least one of our eleven proprietary impact themes through their core products and services. In addition to corporate issuers that we have identified as inherently impactful, we have identified opportunities within the municipals, government, supranational and securitised sectors. For example, investing in supranational issuers such as development banks directly promotes improved economic, social and environmental conditions for people in low - and middle - income countries through job creation and sustainable economic growth. Within the securitised sector, we can promote resource efficiency by investing in commercial mortgage-backed securities, where the underlying collateral is of the highest efficiency standard, ultimately promoting greener buildings and communities. Increasingly, market participants are recognising issuers that are developing differentiated solutions for social and environmental needs. We expect demand for these issuers to increase and for impact issuers to benefit from structural tailwinds, given their focus on essential products and services that address some of the world’s most pressing issues. In addition, the sustainable debt market is growing rapidly as issuers face increased pressure from investors and regulators to finance a more sustainable future. In 2021, sustainable debt issuance doubled to over US$1 trillion, and it is predicted to exceed that figure in 2022 despite an expected decrease in overall primary supply. Green bonds remain the most common product within the labelled bond universe and are forecast to account for 52% of the total sustainable bond supply in 2022. With their key performance indicators (KPIs) and use of proceeds (UoP) outlined at issuance, green, social and sustainable bonds allow investors to target social and environmental objectives through their fixed income allocations, complementing traditional fixed income securities within an impact portfolio. We have also identified some secondary benefits which we feel further enhance the appeal of UoP bonds: • Transparency: after issuance of green, social or sustainable debt, issuers report on the exact projects to which proceeds were allocated, the amounts, the impact and achievement (or not) of targets. This helps us to verify, measure and report on the impact our investments have. • Downside protection: in some periods of volatility, UoP bonds have not sold off as quickly as their non-green counterparts. While this may lead to a pronounced green premium in the secondary market, it highlights the potential for green bonds to exhibit stickier characteristics and offer more stable returns in periods of market stress. We expect the labelled bond market to keep growing rapidly, given the nascent stage of the sustainable debt market, the continuing establishment of carbon reduction commitments by corporations and governments and increased demand from investors. This evolution will pose challenges for investors using an ESG or impact lens. Given this nascency and lack of consistency in credibility of issuance, only a subset of sustainable debt is eligible for our impact universe. We feel it essential that asset owners employ their own assessment frameworks and ensure that only high-integrity issuance targeting true positive environmental and social outcomes enters their universe.
Campe Goodman CFA, Fixed Income Portfolio Manager Wellington Management
Disclaimer For professional, institutional and accredited investors only. Capital at risk. The views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. While any third-party data used is considered reliable, its accuracy is not guaranteed. This commentary is provided for informational purposes only and should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer to sell or the solicitation of an offer to purchase shares or other securities. Holdings vary and there is no guarantee that a portfolio has held or will continue hold any of the securities listed. Wellington assumes no duty to update any information in this material if such information changes. In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573. ©2022 Wellington Management. All rights reserved. As of April 2022.
What does the future hold? We continue to identify compelling opportunities across a range of issuer and issue types in both developed and emerging markets. While the majority of issuance meeting our impact criteria has, thus far, come from developed markets, we are seeing substantial growth in opportunities within emerging markets, where unmet needs are generally more widespread than in developed markets. Across markets, we believe impact investments can play a key role in closing the funding gap for the United Nations Sustainable Development Goals, facilitating the low-carbon transition, and building resilience to the physical risks of climate change. As governments and consumers, particularly in emerging markets, intensify their focus on quality of life and sustainable development, we expect more companies to offer solutions that address unmet needs and for sustainable debt and traditional issuance from impact issuers to see accelerating demand growth. In addition, the fixed income impact universe has improved in quality as well as quantity. Better standards and regulation and the participation of committed market participants have contributed to that evolution. We believe public fixed income markets offer many opportunities for investors to generate widespread impact and the means through which we can generate positive impact have never been so diverse. Working with an experienced investment manager with an established impact platform, deep research capabilities, and an extensive fixed income background may be a sensible solution for investors looking to harness today’s impact momentum and generate positive real-world change through their investments.
Data source: Crédit Agricole
Paul Skinner Investment Director Wellington Management
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