How to make an impact with public equity investments

Impact investing has been a common concept in the private markets space, but now public equity investors can make an impact as well.

At its essence, impact investing is investing in assets with the intention of generating both measurable social or environmental impacts alongside financial returns. “It’s a very broad definition, it leaves a lot of space for interpretation, but that is what most investors in the world understand as impact investing,” said Marc-Olivier Buffle, senior product specialist on the thematic equities team at Pictet Asset Management, when speaking at the Canadian Investment Review’s 2020 Global Investment Conference in September.

Both impact investing and thematic investing in the public equities space take similar approaches, he said. And the work starts with intent. For example, an investment strategy can have an intent to have a positive impact on the environment, while also aiming for capital appreciation.

Once the intent is determined, the investor must develop an impact framework, Buffle added, bringing forward an example of how investors can use the planetary boundaries framework developed by the Stockholm Resilience Centre to decide what to invest in, or not, as part of an environmental strategy. “What the planetary boundary does is basically identify nine environmental challenges that we are faced with in the world.”

Asset managers can then look at the framework and decide to only invest in companies that fall within the sustainable boundaries of operations. And finding out which companies fit within the safe operating space requires a lot of fundamental research, he said.

In addition to the framework, investors can use a thematic screen to select companies that engage in certain types of activities, which is very different than using standard third-party environmental, social and governance ratings.

Many ratings are based on how companies run operations instead of on the products themselves, Buffle said, noting both impact investing and thematic investing don’t focus as much on the operations. “I mean it’s not like they don’t look at the operations, but the most important thing is actually the outcome. It’s basically the product and services.”

Another interesting element of thematic investing is that by defining a specific theme, an investor is by definition potentially not investing in many other activities, Buffle noted.

On top of selecting screens and exclusions, investors can actively engage with companies they choose to invest in. “Active ownership is a very important approach that is a way to actually have a direct impact on the companies and on the world [in] the end through the companies that you invested in.”

Overall, plan sponsors that want to determine if an investment approach is sustainable or has an impact must look under the hood. “Both thematic investing and impact investing are extremely tangible because you are investing in companies that are specialized in certain types of products and services.”