Appetite for sustainable investment solutions has risen considerably among investors in recent years, but deciding on the product or solution that meets the investor's ultimate objectives can be a difficult task.
With 360 new 'sustainable' fund launches in Europe last year, there is a spectrum of approaches to responsible investment, from simplistic negative screens that exclude certain sectors or industries to the full integration of ESG factors in the investment process.
There are also specific thematic or sustainable approaches an investor can take.
One of the latest developments and most demonstrable areas of the sustainable investing universe is impact investing. Investing for impact explicitly aims to target investments that deliver positive, measurable and material change for society or the environment, with the potential to also generate returns.
It is an area that was historically reserved for institutional or high net-worth investors through the use of private finance to fund specific impactful projects.
However, as the availability of data improves and through stringent frameworks to measure impact, the same principles can also be applied to listed equities, opening a new area of opportunity for investors.
When evaluating individual listed companies through an impact lens, investors need to consider those that have the explicit intention of addressing a range of societal and environmental issues the world is facing, which can be framed in the context of the UN Sustainable Development Goals (SDGs).
This means going beyond the financial investment case for a business, to consider three key areas: intentionality, additionality and materiality, and measurement.
This means a company specifically sets out to deliver a particular impact, with that goal being part of the company's mission statement, strategy and actual day-to-day operations.
There is also intentionality from the investor's viewpoint; to generate positive social or environmental impact through an investment.
To achieve this, stocks should be picked because of their ability to generate a positive impact, rather than screening out companies or picking the least bad from each sector.
It is this intentionality, among other factors, that separates impact investing from wider ESG investing.
2. Additionality and materiality
In traditional impact investing, the 'additionality' of the investment is also considered. This is identifying and reporting the impact from every pound, euro or dollar invested in a project, which would not have been generated if that investment had not been made.
In listed equities, where investors are generally dealing in secondary markets where the directing of that funding is not always possible, additionality is considered in other ways, either focused on assessing the role played by the investor in pushing for greater impact or focused on understanding the additionality of the company itself.
To do that, we might ask how the world would be worse off if that particular company did not exist or if it were not adequately funded, or how replicable its products or services are.
We can also consider the 'materiality' of those products or services - this is the level to which they help solve a given societal problem or contribute to a particular SDG; but also the degree to which the material proportion of the company's activities - defined for example by its revenues - are materially centred on that positive impact activity.
Another key differentiator between impact investing and other forms of sustainable or responsible investment is 'measurability'.
This is one of the central tenets of impact investing and also one of its most challenging aspects, especially for investors in public equity markets where measurement can be less clear.
This is because the quality of data, measuring intangibles and quantifying the impact produced by companies are key challenges.
Impact investors have an import role to play in pushing for better metrics disclosures.
UN SDGs provide a universal guideline to align investment frameworks with
The UN SDGs are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. Its timeframes run to 2030.
The SDGs provide a framework to deliver sustainable outcomes, and are increasingly being adopted by both companies and investors as a means of framing their sustainable, or impact, activities.
It is the case however that some of the SDGs are more investible than others. While there is a relatively wide universe of companies contributing to, for example, good health and well-being (SDG 3) or industry, innovation and infrastructure (SDG 9), this is less the case for peace, justice and strong institutions (SDG 16) or partnerships for the goals (SDG 17).
At a company level, there is a wide investible universe of global businesses seeking to address one or more of the SDGs.
In the environmental/climate space, for example, we hold Oersted, the world's largest offshore wind power producer with an ambitious intention
to drive the world towards a greener energy future.
We also own Rockwool, the sustainable insulation manufacturer that is able to measure the carbon emissions avoided by improved buildings energy efficiency as a result of the use of its products.
In the social impact space, we invest in companies driving social inclusion via improved access to education in emerging markets (Cogna) and access to more affordable finance in Asia (HDFC).
For investors willing to do the legwork to understand core impact principles, the opportunities for investment in great businesses that are also helping to solve the world's major problems represent a truly exciting prospects.
Ben Constable-Maxwell is head of sustainable and impact investing at M&G Investments