An impact investment fund comprised of publicly listed companies will certainly bring scale, but will they offer genuine impact?
In the past I struggled with the idea of impact investments having the potential to earn market returns, or above. I mean, wouldn’t that just make them plain old investments? But of course impact investments are valued differently, they have measurable and intentional impact, and they’re identified by a unique brand of investors.
The theory is pretty clear when looking at direct impact investments, into private companies.
But can it be applied to listed assets? Could an impact fund, made up of shares in public companies, still drive social and environmental impacts?
I was sceptical, until I came across the WHEB Sustainability Fund (managed in Australia by Pengana). It purports to be the world’s first listed strategy to release an impact report, they are one of only a few listed equity funds to be included on the ImpactBase database, plus they’re a certified B-Corp.
I listened to Ted Franks speak on the subject when he was in Sydney a few months ago, and I managed to corner him for a phone call, to dig deeper into the impact potential of a listed-equity impact fund.
Can listed assets really be called impact investments?
Direct investments (in private companies) have a clear advantage in their ability to highlight additionality and to represent intentionality. Listed funds, on the other hand, face a far greater challenge in mapping how their injection of capital is facilitating a boost in impact.
Ted Franks concedes this challenge, but he’s confident his fund’s efforts are creating precedence for firms to follow, as well as a nudge towards a greater focus on positive impact.
“The direct impact space is definitely going to see the greatest intensity of investment. But, there’s clearly a level of additionality if we’re steering capital, even in the listed space, into positive impact investments, and that will give them something of a capital advantage.” He explains.
Having a vibrant community of publically listed impact companies supports smaller companies, while also giving investors opportunities to take profit.
“I think of the listed space as being the canopy of the rainforest which allows the rainforest to grow up underneath it….The direct space only works if you can scale that capital up at some point. People have to be able to exit their investments when they get big enough. At some point investments get too big for private capital markets. They have to go to public capital markets.”
“So we’re happy to be part of the chain, happy to accept that you may dilute the intensity of your impact, but what you gain is that you scale it up, and you can get more capital into impact with access to a much larger asset pool.”
What’s in a name? The impact evolution
Terms like ‘organic’, ‘free-range’ and ‘Australian made’ imply a certain quality and reliability—the term impact investments is no different. Noting of course, that with little regulation controlling what investment strategies can use the label, it’s a matter of buyer beware.
“For us, the word ‘impact’ is the single word that best encapsulates what we’re doing; it’s been that way for the 12 years we’ve been running the strategy. I do have sympathy for the direct impact teams, it’s clear that as soon as you let that word go out into market it’s going to get adulterated by green-washers, and there’s no doubt we’re already seeing that.”
Engagement is the bread-n-butter
A public company is answerable to its shareholders, and the challenge for impact investors is to have their voice heard despite holding far less than a controlling stake.
Franks explained that engagement is a core part of their work, but in the end, if companies in which they’re invested drift away from their mission, and if they can’t be convinced to correct their course, they’ll exit their stake.
“There’s a number of companies we’ve been forced to sell. They drifted away from an impact focus so we parted ways. But just the same there are some stocks we invested in early that may no longer fit. Our impact reporting has evolved so much that some of our older holdings wouldn’t even get close to getting into the fund these days.” Franks says.
And it works both ways; an investor’s efforts to drive change in a company will force the company to look deeper into their operations, while also helping the investor build capacity around measuring impact.
Those pesky ‘non-financial’ elements of a company are notoriously difficult to measure. Sure there are some solid products from MSCI and Sustainalytics that measure key ESG factors, but impact investors need to go further, beyond data.
Qualitative data is vital, and it’s no easy task to extract it from public companies.
WHEB took this challenge seriously and each year they produce an Impact Report (they just released their 2017 report). It’s unique in the industry and it offers everything from a sectoral breakdown of where they’re investing (resource efficiency is at the top), total C02e emissions avoided (201,000 tonnes), total people receiving healthcare (11,000), as well as key SDG achievements.
They also have an ‘Impact Calculator’ which allows investors in the fund to see what portion of the fund’s impact they were responsible for.
It’s a big step forward for large-scale funds, it sets a high bar for disclosure and it shows that there is plentiful data available on these ‘non-financial’ factors.
If they wanted to go further they could look into the social outcomes of their work. Beyond explaining how much pollution they’ve avoided, they could explain what impact this has on the communities involved and why this matters. It’s a circular argument that would /should lead the fund managers back to the start to ask; why exactly do we want to reduce emissions?
Asking these kinds of questions up-front will make their outcomes so much more specific, more human and more impressive.
We need more people talking about it…
As our conversation was wrapping-up I asked Franks what questions weren’t being asked in this space.
He took a moment before he replied, and then he explained that getting deep on the issue, like we had, was what he wanted to hear more of. He explained that there are far too many conversations that are shallow, that don’t go beyond trying to define terms.
This is why I wanted to speak to him in the first place: to dig into the impact potential of listed assets, balanced against the considerable constraints of public ownership.
Franks was unabashed in citing direct investments like the Peterborough Social Impact Bond as a gold standard towards which they can only aspire. Comparisons with direct impact funds are vital, but we shouldn’t let them banish the prospects for the listed space to make an impact.
Public companies have long shareholder lists, but they also have stringent requirements for transparency and reporting, and now, more than ever, we’re seeing the real power of activist investors.
It’s all about engagement, and Impact fund managers are showing the power of opening a dialogue with company directors to drive better behaviour, to boost transparency beyond just financial factors and to create new networks of communication, new feedback loops, between shareholders and management.