With a deadline of 2030, the United Nations Sustainable Development Goals (SDGs) are a comprehensive list of challenges, both environmental and socioeconomic, that we face as a planet. They aim to drive prosperity for all in a sustainable way, and encompass health, hunger, the natural world and much more.
When it comes to public equity markets specifically, we see a huge underserved need in companies that are helping the world, and can generate returns by doing so. Some SDG targets are best met by investors in listed equities. Take healthcare. To help fulfil the targets for SDG 3, Good Health and Well-Being, companies need considerable capital at an early stage of their life. They must often spend a great deal on research & development, long before they see a return on this investment. They also need to scale up production, to help solve global health problems. Listing on public markets can unlock that capital. And as we’ve seen in 2020, companies with solutions to our biggest health challenges are well-rewarded by the market, yet serve the needs of more than just their shareholders.
Impact investing: keeping the core tenets
In applying impact investing to public equities, we believe that the core tenets of impact investing, first established in private markets, need retaining but adapting: the search for investments with the intention to generate additional positive impacts, alongside a financial return.
Unlike private equity investors, public equity investors do not control the businesses they invest in. For this reason, we must look for companies already on a clear mission to achieve a specific positive impact – they should be companies that already share our intention to contribute solutions towards the world’s environmental and social challenges.
Impact investors also want to show that their investment creates an additional positive impact that makes a tangible difference to lives. We have to consider this “additionality” in a different way from private market impact investors. As buyers of equities in secondary markets, we cannot claim that our capital is solely responsible for the impact generated.
The first thing we consider, therefore, is how the company itself drives an additional measurable positive impact, through the product or service it sells to generate this outcome. We only back businesses that sell an innovative and differentiated solution to either an environmental or social challenge, rather than one which is easily replicable by other companies. This way, we can show that if the company didn’t exist, nor would the positive outcomes they generate.
However, we should not underestimate our influence. If a critical mass of shareholders allocates capital based on a company’s social and environmental impacts, companies are pushed to direct more of their capital to divisions of their businesses creating solutions. Moreover, we engage with companies to try and minimise specific negative impacts that result from their business.
We therefore believe that the concept of additionality can and should be considered at both the level of the company as well as the level of investor. Listed companies are particularly well-suited to delivering research and development-intensive, innovative impactful solutions.
The SDGs: a helpful framework
In seeking companies providing useful solutions, we need a proprietary framework to identify problems that require solving. This is where we find the 17 Sustainable Development Goals useful. We prefer to concentrate on the 169 targets linked to the goals, since they are more specific.
We call our framework the Regnan SDG Taxonomy. It seeks to identify products and services that exist to meet the SDG targets, to understand their scope to scale, and to learn about the companies that sell them.
As a public equity investor, we might not have a seat on the board, however, we use our engagement to encourage management teams to improve disclosures about the impacts driven or enabled by their products and services.
Our double mission
To conclude, the world needs impact investing in public equities to help deliver the SDGs. For this reason, we are on a mission to do two things. We want to preserve and adapt the concepts that evolved from the private markets, to maintain the integrity that gave birth to impact investing. At the same time, we want to provide a solution that allows additional positive impacts to be delivered at scale, through a platform accessible – and attractive – to any investor. We set the bar high for both the impact that our investments generate, as well as their returns.
Author: Tim Crockford Senior Fund Manager, Head of Global Impact at Regnan, the responsible investment affiliate of J O Hambro Capital Management. Contact your financial adviser to find out more.
Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment. The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. Regnan is a trading name of J O Hambro Capital Management Limited. Issued and approved in the UK by J O Hambro Capital Management Limited, which is authorised and regulated by the Financial Conduct Authority. JOHCM® is a registered trademark of J O Hambro Capital Management Ltd. J O Hambro® is a registered trademark of Barnham Broom Holdings Ltd. Registered in England and Wales under No: 2176004. Registered address: 3rd Floor, 1 St James’s Market, London SW1Y 4AH