“Most investment impact is not achieved through impact investing,” said Dan Neale of the Church Commissioners for England as he opened the discussion.
“Most of us can’t be impact-first investors, we can’t take concessionary returns,” he added, explaining that when people talk about making an impact, they usually mean that “some positive stuff happens” in their investments where the potential return was the main driver for investing.
As proof, he pointed to less than 1% of assets under management globally are allocated to making an impact, based on The Global Impact Investing Network’s claim that the market is worth $1.1trn (£900bn).
The main problem is that it is harder to make a positive social impact than a positive environmental outcome, where an investment causing less harm to the climate is acceptable. “You can’t have that equal narrative with social,” Neale said. “With social we can’t say this is an investment with less slaves. It doesn’t have that same ring as having less harm on the environment.”
Another issue with the social pilar of ESG is the lack of offsets. “You can’t say that the good we are doing over here makes up for the bad over here,” Neale said. “There are positive impacts and there are negative impacts with every investment, but they do not exist on a balanced scale.”
However, Abbie Llewellyn-Waters, who is responsible for global sustainable equities at Jupiter Asset Management, disagrees with Neale, believing that it is not mutually exclusive to have a capital growth objective and a positive impact. “The two can co-exist comfortably. It is not one or the other,” she added.
Social mobility
One “exciting” capital growth opportunity and positive social impact multiplier Jupiter is looking at is financial inclusion. “There are 1 billion unbanked adults in the global economy, so investing in companies that enable the digitalisation of cashflow is an important step forward for inclusive economic growth,” Llewellyn-Waters said.
This means investing in digital payment operators, payment networks or digitalisation-enabling software. “It is important, particularly for communities in rural or remote regions where they don’t have the infrastructure to facilitate economic inclusion from a financial service provision perspective. That is an exciting aspect that we can look at,” she added.
Another social mobility enhancer in Jupiter’s portfolio is a company that makes cochlear implants, which synthetically recreate the neural pathways between the brain and the ear.
“The congenital deafness run-rate for babies is one in 1,000 in the developed world. It runs about one in 250 in some other regions,” Llewellyn-Waters said.
“The economic isolation of deafness can be detrimental to the child,” she added. “Treatment for the first two years of life leads to almost 100% inclusive economic trajectory for that child.”
Then there is Valspar, a US social mobility enabling paint manufacturer. When a sole trader comes into one of their retail outlets, they facilitate full invoicing to enable them to operate on a company basis, allowing for decent work and economic growth “yet they are selling paint”, Llewellyn-Waters said.
“So it is an interesting way of looking at the effect your capital allocation process and the impact multiplier can have on the economy,” she added.
The four Cs
But how easy is it to make a social impact through investing in real assets. In the past 15 years, Legal & General Investment Management (LGIM) has invested more than £30bn in assets such as transport, schools, commercial buildings and housing.
“For us, it is about improving asset value and performance, and that goes hand in hand with positive social and environmental outcomes,” LGIM’s Shuen Chan said.
There are many reasons why making a social impact is important to LGIM, but there is one fundamental driver. “The infrastructure investments we make and the assets we develop, manage and operate are ultimately for people and communities. Without them, our business model does not work,” Chan said.
So LGIM is focused on making place-based impacts. “What we ask ourselves is, how can we as real asset investors contribute, deliver and catalyse change for the communities where our assets are based,” she added.
This approach is underpinned by what Chan called the four Cs. The first is the community where the asset is based. “The social challenges facing a coastal town such as Poole in southeast England are different from the challenges faced in Maryland in the US, for example.”
Then there is commercial. “There doesn’t need to be a trade-o between driving positive outcomes and commercial returns,” Chan said. “There is a proven relationship between real assets, building resilient economies and investment returns.”
The third C is collaboration: identifying strategic partnerships that help you understand the needs of the local community. Finally, there is being catalytic, in that when you understand how you can drive change, you drive it at scale.
Investing with purpose
Agreeing with Chan that it is possible to earn a return from making a difference to the lives of the most underserved in society, was Anita Bhatia, investment director of the Guy’s and St Thomas’ Foundation.
The foundation’s purpose is to address health inequality. Bhatia and her team approach this by looking at countries which do not have a public health system. “So how do we make investments, direct or indirectly, that can deliver accessible, affordable healthcare to vulnerable people whose needs are not being met?”
But this is not just about access to healthcare. Other themes that are connected to this include what impact is climate changing having on vulnerable populations.
“There is more volatility in the weather, more floods, more heat waves,” she said. “And they affect the poorest in society, the people that either end up with severe health conditions or even death. So, how can we make investments using climate as a sleeve in order to be inclusive?”
Bhatia then moved into diversity, equity and inclusion. “One of the trends I’m seeing is the supply of investment opportunities,” she said. This typically means litigation funds, which are trying to address social and racial injustice. “[This] is an exciting space if you are investors in private markets.
“What I would say is, focus on your objective, spell it out and then embed it into your investment strategy with either an impact thesis or a theory of change,” Bhatia added.
Respect and protect
Setting high standards of human rights is a big part of reducing inequality, but “ensuring” the protection of those rights could be difficult for investors. “Words are to social what numbers are to climate,” Neale said.
“Ensuring is a tricky word. As soon as you get outside of your own business, it is hard to ensure anything. You can require stuff in your contracts, but then you go into another tier and another tier, and it gets harder and harder.
“Governments have a duty to protect and enable human rights,” he added. “Businesses have a responsibility to respect human rights, which means they need to identify where they are linked to such risks. They then need to take action to avoid, mitigate and, if necessary, provide access to remedy for those.”
Frameworks such as the UN Guiding Principles set out how you could do that. “But the problem with the supply chain stuff, is that it is an exponential problem,” Neale said.
Supply chains are not like little links in a neat line, he explained, but more like a network where each link splits into different tiers. The chances, therefore, of identifying and mitigating against human rights abuses are quite small without having strong systems.
“If your supplier is a tier one family-run farm in Hampshire, you probably have a good chance of being able to use your leverage to figure out and address what the risks are,” he said. “If it is tier six in China, you are going to be limited in what you can do. It is not easy.”
To improve the chances of success, Llewellyn-Waters recommends that investors commit to the UN Global Compact,
which has principles on issues including human rights. “This is forced labour, modern slavery and child labour,” she added. “This is the base-level standard of what should be acceptable for companies operating on a global basis.”
Another way to improve social mobility in supply chains is to encourage the living wage. Llewellyn-Waters used the example of Unilever, which wants all their tier one suppliers to pay a living wage to their employees by 2030 or find another client.
“The social impact multiplier of that is huge,” she said. “We are talking about some of the most vulnerable manufacturing and agricultural workers in Brazil, China, India, Indonesia, Vietnam and the Philippines.”
The right structure
Equity gives investors influence over companies, but it is a different story with debt, where lenders do not get a vote.
LGIM are long-term debt investors, typically lending between 10 and 25 years. “That long-term element allows us to build relationships and engage with the borrowers,” Chan said. “But as lenders there is only so much we can influence once we have invested.
“So it is important that we take into consideration environmental and, in this case, social factors in the pre-investment stage,” she added.
One example is housing. With many of the world’s homes expected to still be inhabited in 2050, there is a huge retro t challenge to decarbonise that stock. LGIM has invested more than £300m in social and affordable housing and linked the loans to the borrower’s decarbonisation objectives.
“This not only meets low-carbon economy objectives, but also addresses fuel poverty, because high energy bills are a fundamental challenge that the affordable housing sector faces,” Chan said.
Community engagement
Measuring the impact of your investments is not easy. LGIM has created a place-based impact framework around the core pillars of inclusive economy, quality of life and climate and nature. Beneath that are the key performance indicators.
“Impact, especially social impact, means different things to different people,” Chan said. “Although measurement is important and a rigorous and consistent approach is critical, I want to stress that when it comes to social impact, measuring someone’s quality of life should not be distilled into a number or monetary value.
“This is why we approach it by understanding what the needs are for the community based on where the asset is,” she added. An example of this is that LGIM owns a shopping centre in Poole, which is connected to a high street that Chan described as “dated and unloved”.
“The first thing we did was provide free rates for two years for the local businesses on the high street. “That not only created jobs but generated over £2m of revenue for the shopping centre. That comes back to the commercial element.”
On community and collaboration, LGIM has developed and nurtured organisations to tackle serious local social and environmental challenges, including homelessness and patient waiting times. One example is its partnership with the NHS by building a diagnostic centre in the shopping centre. “As a result, it has driven footfall and, therefore, rental income,”
Chan said. “It has treated 4,000 to 5,000 people for ailments such as cataract and screening for breast cancer. It has basically driven commercial returns for us.
“This is one of many examples where we are thinking about the needs of the community and engaging with them.”
Leaving no one behind
There is a social aspect to the energy transition in the desire to leave no one behind as new processes emerge.
“People are at the heart of [a just transition],” Neale said. “You have the workers, the community around the workers, the longtail supply chain and the consumers of those products. These stakeholders are what investors should be thinking about when they are looking at those companies.
“We don’t want to repeat the 70s and 80s with lots of redundancies, where people are left unskilled and the social unrest that comes with that,” he added. “We don’t want hollowed out communities and we don’t want contagion in the supply chain.”
What is needed is decent standards of green jobs coming through, supply chains that don’t use forced or child labour and affordable energy. “The problem is that green does not always equal good. There are social risks that go with that, but they are part of the transition that needs to be sorted,” Neale said.
Representation
Other societal tailwinds include what Jupiter calls preventative healthcare. This is where companies support early detection of disease, which usually leads to better patient outcome and lower healthcare costs.
“We like that as a structural tailwind,” Llewellyn-Waters said. This means investing in vaccine manufacturers, diagnostics, microscopes, heart rate monitors and optical scanner makers. “We like that because there is less regulatory risk from a pricing perspective and also the outcomes are typically more positive in the preventative aspects,” she added.
It has, for instance, a company in its portfolio that enables 6 billion diagnostic tests each year for the early detection of cancer. “That is a huge social impact multiplier through that product aspect there,” Llewellyn-Waters said. “We like those types of companies.”
The narrative for female participation has for a long time been about representation at senior level, but Llewellyn-Waters believes that we need to “go a bit deeper into the workforce characteristics”.
She pointed to reports from the IMF and World Bank on the trillions of dollars that could be added to the global economy if there were more women on the global workplace. “This feels like an easy, tangible, quantifiable analysis set for us,” she added.
One such company in Jupiter’s portfolio is an Australian bio- tech, where half of its employees working to improve the efficacy of vaccines are women.
Llewellyn-Waters closed our conference with a thought that investors should have a greater understanding of the makeup of the companies they invest in “and what that can do on a global inclusive growth participation basis”.
“That is also something that you could ask your managers to look at on a portfolio aggregate level: what is the female participation rate of the companies that you invest in?”
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