It’s difficult enough to measure your impact when you’re investing in private markets, where you have a material shareholding, and maybe even a seat on the board. But when it comes to public equities, it’s far harder.
Data is more difficult to access, you’ll surely have a minority shareholding, and the other shareholders may not share your focus on the environmental and social impacts of the company. The odds are stacked against you, but, that only means the potential for impact is even greater.
Public equity markets are huge, so to find ways to shift capital towards the best performing companies, and to influence the laggards to make change, well that has the potential for major positive impact.
Tim King is CIO at Melior, a fund manager focussed on investing in Australian equities. The firm identifies progressive companies building innovative technologies, but they also work to ‘transition’ companies that may not have the best record, but which have huge potential if they make the shift.
“I started out looking into ESG, as opposed to impact. I started looking at ESG factors, as really an addition to my tools of financial analysis, because embedded in ESG, there’s a lot of information and there’s a lot of alpha if, number one, you understand those ESG risks and opportunities. And number two, and as equally important, if you can integrate that in terms of what it means for the P&L and balance sheet of the companies. There’s immense alpha opportunities in that.” Tim says.
“So that’s why I started looking at ESG way before it was as popular as it is today. And in fact, back in the day, and I’m talking 15 years ago, it was considered pretty odd that I would go to a company meeting and ask them about their emissions and safety and gender diversity, and so on.”
The Bridge from ESG to Impact
The field of impact investing is nascent, and as the industry evolves, so too is the language used. Terms like ESG and Impact are often used synonymously, but when we dig into the details, they’re quite distinct approaches.
“We think it’s entirely different.” Tim says.
“First of all, there’s the notion of impact in terms of; if I invest in Company X, it provides goods and services that will help solve a particular one or more of the UN-SDGs. So that company, its products and services, are creating positive impact. So that’s one dimension of impact.”
“The second dimension of impact, and this is where the additionality question comes in, is how do we engage with that company so that when it goes about producing those products and services, it does it in a better way, to benefit society, the environment, and build better governance as well. To us, that’s additionality. That’s conceptually a different form of impact, but both of them are important. The ESG bit is the way we think about how a company goes about doing its business.”
The Challenge of Additionality
Additionality refers to the investment offering capital to a project that would not have gone ahead, had it not been for that investment. This is quite an academic requirement, and difficult to achieve in a secondary market, like share trading, but that doesn’t mean it’s not possible.
It comes down to influence, and how the act of you being a shareholder, can influence and impact the company’s trajectory.
“The impact needs to be a target, and it needs to be measurable. The impact is through multiple dimensions. So, we frequently speak to the boards of companies, for example, and we have very clear evidence where the companies, and we document this in our annual Impact Report, where the company will, on the record, say it’s because of their engagement with Melior, that they have, whatever it may be, adopted a Reconciliation Action Plan, adopted a 2040 Gender targets, it’s because of our engagement with us.” Tim says.
“So we provide, I think, a really important job in talking to companies about what we think they need to do to address their issues.”
This all takes time and resources, and it will shrink your investable universe. But Melior has shown that doesn’t have to lead to impared returns.
“If we look at investor-land, there’s this notion that if you invest the way we do, you’d have to take a discount on return. Well, we’ve certainly proven in the time that we’ve been going that the inverse is the case. We’ve had very good returns. And indeed, the academic evidence would support our case.” Tim says.
“And, many companies think the same thing. When we start a meeting, they go, well this all sounds really interesting, but how much it’s going to cost us? And so it takes time to explain that, and the academic research indicates, that you actually will generate a more resilient company, that through time, will outperform.”
Influence is not merely a factor of your shareholding size
Finance is a pragmatic industry. Outcomes are most often measured in dollars, and if there’s no data, then it didn’t happen.
One would think that when it comes to influencing a public company, it’s the size of your shareholding, that dictates how much you will be listened to. But Tim argues that so rapid is the shift to sustainability, that companies are scrambling to catch up, and they’ll listen to you even if you’re not a shareholder.
“I don’t think you need to be a shareholder. So I think that’s a complete misnomer. And I’ll tell you why.”
“I mean, this week, I presented the board of a large emitting company. We don’t invest in them. They reached out to me and said, Look, we’ve seen what you’re doing. We’re getting so much stakeholder pressure that we need to drive change, we want to actually talk to you, because you’re not a shareholder, you’re completely independent. You’re not a consultant, I’ve got no axe to grind. I presented to the board this week and told them what they needed to do, in my opinion in terms of a whole bunch of things.