In September 2015, 193 countries agreed to 17 ‘Sustainable Development Goals’ (SDGs) as part of the United Nations 2030 Agenda for Sustainable Development. These goals are milestones to steer our world onto a more sustainable path. The ambitious agenda aims to end poverty, build peaceful and inclusive societies, to protect human rights and to ensure the protection of the planet. The SDGs are relevant to all stakeholders in society: governments, the private sector and society.
Some investment funds aim to not only invest with the UN SDGs in mind but measure the impact of their investments towards these goals or similar objectives. These so-called ‘Impact Funds’ regularly update investors on the progress made in tackling a range of societal and environmental challenges in ‘Impact Reports’, which are published separately to traditional performance reports where attribution and current investment thinking is discussed at great length. Impact reports can add credibility to claims made about positive societal and environmental benefits and help prove a fund manager is serious about the issues rather than simply paying lip service.
Impact reports do have limitations, though. There is no such thing as a perfect company and there is no easy way to sum and ‘net off’ different positive and negative impacts. Managers also rely heavily on investee companies to report the positive impacts associated with their products and services, and in almost all cases they are estimating rather than measuring with precision. Without measuring the performance and behaviour of every individual who uses a product, an actual measurement would be impossible. However, impact reports help set a framework for investing towards non-financial goals and help bring alive the beneficial effects of this form of investing, which is in itself important.
Governments alone cannot cover the massive costs of addressing global issues like climate change; companies need to be at the vanguard of the solutions. Ultimately, the efficient direction of investors’ capital towards the right businesses is vital, which is what makes impact reporting so important. It can offer tangible evidence that things are moving in the right direction, as well as help bring about more engagement with end investors.
Baillie Gifford Positive Change
Companies within Baillie Gifford Positive Change Fund are organised into four themes which represent key global challenges; Social Inclusion and Education; Environment and Resource Needs; Healthcare and Quality of Life; and Base of the Pyramid (addressing the needs of the world’s poorest). Manager, Kate Fox, explains, “We are not just helping people invest but channelling capital in a responsible way towards companies that are going to innovate and address global challenges to create a more sustainable world. This is what impact investing is all about.”
The fund bears all the hallmarks of Baillie Gifford: a high conviction portfolio of a relatively small number of holdings, a bias towards exciting but relatively expensive growth companies and a low turnover – meaning positions are kept for a long period. Baillie Gifford has a long history of being an engaged shareholder that places great emphasis on the importance of governance, though their approach will not appeal to all socially responsible investors. The team adopt a fairly broad definition of which businesses qualify, particularly within the Social Inclusion basket, which permits investment in large technology firms where there may be certain issues relating to privacy and tax. This underlines the importance of understanding a fund’s philosophy and stance on certain issues before investing.
Nonetheless, the managers assert that there is a considerable net benefit from the estimated 2.2bn people that have been provided with mobile and digital services by their holdings Alphabet (which owns Google) and China’s Tencent. Alphabet’s Android operating system powers over 2.5bn mobile devices globally, many in emerging markets, enabling many people to access the internet for the first time. Alphabet also helps by tailoring the digital experience to the needs of emerging markets. For instance, their digital payments app in India, now called Google Pay, helps 67m people and businesses easily pay with just a few taps.
The team continue to look for more investment ideas in the Base of the Pyramid theme. A key challenge is to ensure that companies genuinely target and help the worst off in society, rather than just operate in countries where poverty is commonplace, and that they can build a strong and defendable business – and hence meet both investment and non-financial objectives.
In terms of environmental impact, the managers estimate that holdings Ecolab and Xylem allowed their customers to save a total of 900bn litres of water, while Ecolab’s wastewater treatment solutions also help companies reduce toxic outputs from their processes. Meanwhile, the Healthcare theme includes Teladoc, the largest telemedicine company in the US, providing more than 450 easily-accessible medical services, such as primary care appointments, expert second opinions, behavioural health support and chronic care management via phone, online and through apps. The company completed approximately 4.1 million telehealth visits in 2019 in over 175 countries, an increase of 57% from 2018.
Read the full Baillie Gifford Positive Change impact report
Brown Advisory US Sustainable Growth
Brown Advisory US Sustainable Growth categorises holdings according to a series of impact themes to illustrate the variety of challenges and opportunities their portfolio addresses. These themes are Sustainable Technology Innovation (43% of the portfolio currently), Efficient Production and Conservation (14%), Economic Mobility/Community Development (10%), Health & Wellness (25%), Clean Water & Sanitation (5%) and Sustainable Agriculture (3%). The team do not target a specific ‘impact mix’ with positions a function of their research into the relative merits of individual businesses.
Brown Advisory have developed their own proprietary sustainability rating system for companies. Many third-party rating systems are based entirely on historical data. Their ratings, in contrast, start with historical data but emphasise a forward-looking perspective focusing on a combination of a company’s sustainable initiatives and the competitiveness of its products or services. Crucially, Brown Advisory do not use their scoring system as a blunt “pass/fail” test and caution against relying solely on any rating system for assessing the merits of an investment portfolio.
Among the impact case studies highlighted in the fund’s most recent impact report, software company Aspen has been a feature of the portfolio for some time. It serves the energy, chemical and engineering/construction segments, which means that some of its clients are responsible for a great deal of pollution and environmental impact. The company’s technology helps predict emission spikes, provide advance notice of equipment failure, warn of pending abnormal reactor conditions, optimise usage of vehicle fleets and manage raw materials inventory.
Aspen believe their software can help customers reduce energy costs by 10-30% and reduce capital costs by 10-20%. The company estimates that it has helped many clients reduce greenhouse gas emissions by as much as 10%. Although their software is deployed at 19 of the 20 largest energy companies, 18 of the largest engineering and construction companies, and all the 20 largest chemical companies in the world, its influence is still growing.
Since last year, Brown Advisory have joined three engagement working groups run by industry leaders (PRI, Ceres and the Intentional Endowments Network), all of which are focused on key issues related to climate and sustainability. It also signed onto the Climate Action 100+ initiative, alongside more than 370 other investors representing $35 trillion in investment assets. The initiative seeks to engage with the 100 most significant emitters of greenhouse gas in the world, so these companies’ next steps are major factors in a successful transition to a low carbon economy.
You can view the full impact report on Brown Advisory’s website.
In WHEB Sustainability’s latest impact report we learnt more about their ‘impact engine’ which is a proprietary research tool used to analyse and evaluate the impact of existing and potential investments at a granular level. It assesses the impact intensity of products and services (what a company does), and a second step assesses the fundamental quality of the business (how it operates). The two dimensions are plotted together on an ‘Impact Map’ with only companies with a twin positive impact considered for investment. Interestingly, more than 80% of listed companies receive negative scores.
We consider WHEB’s impact calculator to be a market-leading interaction tool, showing the positive benefits associated with an investment in the strategy in terms of renewable energy generated, waste material recycled, carbon emissions avoided and five other environmental and social factors. In 2019, 29 companies (representing 56% of the strategy) self-reported at least some data covering performance in 2019. This represents a significant improvement on the 40% that reported data in 2018. The proportion of the strategy that has not been included in the impact calculation is now less than a third; down from 40% last year. WHEB actively engage with all investee companies to encourage more self-reporting.
WHEB is also a ‘Certified B Corporation’, a for-profit company certified by the non-profit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. 100% of their electricity used is from renewables, they offset 20 tons of carbon from travel in 2019 (down from 43 tons in 2018), 40% of waste at the group is recycled and they even keep 80,000 bees on their office roof garden. WHEB has formally recognised the climate emergency and committed as a business to achieving net zero carbon emissions by 2025.
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