Bringing an ‘impact’ mindset to listed equities

It’s time to rethink the purpose of investing. As investors, we have often been presented with a false-choice narrative – either focus on financial performance or try to affect societal or environmental good. We believe that one goal actually works to reinforce the other—that, increasingly, it will need to as we face greater and greater challenges that pose risks to our economy, and by extension, to our investments.

One of the biggest risks is that our planet is undergoing significant climate change, something we are acutely aware of as a part of AXA IM that is based in California, a state which is once again battling widespread wildfires and enduring related power outages. It is evident that substantial efforts will be required to mitigate the damage caused by climate change, let alone alter the course.

Companies are already grappling with the implications of the physical risk itself, but also the external responses to those changes in the form of regulation, reporting, taxation, and shareholder actions—necessitated by the growing magnitude of the impact of taking no action. The reality is that if we have any hopes of reaching the 2˚C scenario, publicly-traded companies need to reduce emissions drastically—an estimated 30% in just 10 years.¹

As investors—asset owners and asset managers—we control a vast amount of financial capital which can be leveraged to motivate an accelerated path to addressing the causes and effects of climate change. While our primary responsibility is to deliver on our clients’ investment objectives, there is growing recognition that by investing in a way so as to mitigate climate change we are also protecting our economy and our markets, thus ensuring that we can deliver on promised investment outcomes.

How can we achieve impact in listed equities?

‘Impact investing’ is often defined as investing with the intention of generating positive and measurable social and environmental outcomes, as well as competitive financial returns. We would reverse (and strengthen) this definition to say that, if we are to achieve competitive financial returns, we must achieve positive social and environmental change. Our current clients increasingly inquire about ’impact’; we expect the next generation of investors will demand it.

The widespread view that impact investing is the sole domain of private markets is starting to change. Some of the world’s largest investors are looking to align their investments across all asset classes with their ‘impact’ ethos. While it is important that we preserve the credibility of ‘impact’ investing, it is in our collective interest to push ourselves to think about how we can achieve impact in listed equities. What we know to be the case is that when big capital gets behind an idea, things start to move. We believe that we can, and should, leverage as much of the heft and breadth of the listed equity market to work toward improved societal and environmental outcomes, in particular for an issue as critical as climate change.

But is ‘impact’ possible in listed equities? We believe it is, though we cannot possibly argue that shares changing hands is the same as providing capital to a project that otherwise wouldn’t exist. Nonetheless, as investors in listed equity we do have effective tools at our disposal that we can, and must, use to influence much-needed change: engagement² and voting.

Overcoming the practical challenges

There are two key pillars of traditional impact investing – intentionality and additionality. Intentionality is the desire of the investor to achieve a specific impact. Additionality is the creation of an impact that otherwise would not occur without that investment. As investors, we need to be careful to define intentionality and additionality in an asset-class appropriate way. We believe that listed equities can be used to achieve real impact by intentionally seeking companies that are producing ‘green’ goods and services, as well as those that are meaningfully improving the environmental quality of their operations. Impact can also be achieved by engaging actively and holding management accountable to key performance indicators of impact, while acting as a shareholder that not only supports but demands long-term value creation over and above short–term results.

But as we contemplate the theoretical argument for ‘impact’ within listed equities, we should acknowledge the practical challenges. The first comes in the form of selection universe. Only a small handful of companies have a significant portion of their revenue aligned with societal or environmental goals. This leads directly to the second set of challenges, the potential for concentration risk and crowding. Finally, the double-edged sword of liquidity (both of the asset class itself and of most listed equity strategies) means that even the most committed investors may exit in the face of poor near-term performance, or a crisis in another less-liquid asset class.

Delivering on ‘impact’

These challenges lead us to a single conclusion: we believe impact investing is best achieved through a broadly diversified portfolio that provides a long-term sustainable investment strategy. When considering impact investment, our focus at Rosenberg Equities is to build strategies aligned to some of the sustainable development goals of the United Nations. Such strategies contain deep impact names, but at the same time have exposure to companies that may not meet the same threshold for ‘impact’, but that are aligned nonetheless with societal or environmental goals. In this way, we build portfolios that seek to drive impact outcomes and capture upside opportunity, but that are also well diversified. We believe this will lead to more stable active performance over time.

Despite the challenges, the potential benefits of extending ‘impact’ into the realm of listed equities are enormous, both from the perspective of accelerating meaningful change that will ultimately protect capital markets, as well as from a narrower financial-return objective. The investment management community has the opportunity to accelerate the mitigation of climate change. Making that opportunity a reality requires a collective effort from asset owners and asset managers around the world to foster change through active engagement and active investment – thus affecting ‘impact’ within our own asset class.