When it comes to impact investing, we hear a lot about the need to scale-up the opportunities for impact. Private market impact investments have pioneered the sector, but the ticket sizes make it inaccessible to the majority of investors.
Public equity markets, on the other hand, are open to almost everybody. If the right companies can be identified, and if the investor has the right tools to influence them, then the potential for positive impact is huge.
Kerry Series launched the Inspire Australian Equities fund in 2017 with precisely this intention. He wanted to find Australia’s most high-impact companies, and build a fund that would offer investors the opportunity to make a decent return, with the knowledge the companies they own are focussed on impact.
“We want to invest in companies that are intentionally doing good for society, or the environment. So their business, their core business, is directed towards activities which contribute to solutions to the social and environmental challenges that we face.” Kerry says.
The Inspire model is based around three pillars which seek to differentiate their analysis process from their peers, who focus on a more limited set of financial and ESG factors.
“The first pillar is this idea of intentional, positive impact. When we analyse a company we’re looking beyond a story about transition, or that they’re improving their ESG factors. We’re looking at whether their core business has positive, intentional impact.” Kerry says.
“Pillar two is additionality. Which is about the difference we make to the company, as an impact investor, as opposed to a normal stock market investor. And pillar three, is measurement, which is all captured in our annual impact report.”
Being able to measure the impact a company is having means identifying a clear set of outcomes or KPIs. For Inspire, the focus is squarely on the UN SDGs, and ensuring their investments are contributing to solving one or a number of the global goals.
“So we go through a process when we look at every company as to whether they can make it into our impact universe, does it contribute to a solution to one of the UN SDG targets, that’s the process we go through to define whether a company is suitable for our impact universe.” Kerry says.
Impact vs ESG
The world of sustainable investing operates on a spectrum, and while impact investing is arguably the most green, ESG is at the other end, it essentially represents a baseline of non-financial analysis.
Kerry explained his view on the dividing line between Impact and ESG.
“You could say that every business has impact on society and the environment, many of them have negative impacts and a number have positive impacts. But when we think about impact investing, and the approach we’re taking, we are focused solely on that positive impact part of the stock market, and how that differentiates us from ESG funds.” Kerry says.
“I think ESG is effectively mainstream now; who doesn’t take into account environmental social governance factors when they’re analysing the company? The difference is, we are purposefully intentionally allocating capital to companies that positively impact society and the environment. Or the outputs, the outcomes, the impact of their business activities, does something positive for the world.”
It’s clear Kerry sees the imperative of impact as more than just a financial one. It’s about ensuring the balance of life on earth stays in harmony.
“We’re looking for companies that are driving the solutions to our environmental and social problems. What I think is really important in this space is that the clients, the end investors, are getting what they want, that they understand what they’re investing in, and the fund does what they expect it to do.” Kerry says.
“And for my money, I want to be invested in education companies and healthcare companies or renewable energy companies, because I see those as the solutions to social environmental challenges.”
Additionality
When applying an impact lens to listed companies, the concept of additionality can be challenging. The term refers to whether an investment is addition, whether or not the company would have access to capital, were it not for your investment. Due to the nature of public markets, the focus is shifted more towards the unique traits of the investor; how they contribute to the company’s operations, and how they can influence them to do better.
“When we talk about additionality, we think there are two main factors that apply to impact investors in listed equities. The first one, is we have a great desire to put new capital into companies. So although they’re trading on the stock market, and they will come by and sell their shares, we like to invest at the time of IPO, or when the company is raising new capital. Putting new capital to work, even though these companies are listed on the stock market, is an important factor for us.” Kerry says.
“And the second one is around engagement. We think about engagement differently from many other investors. We see two levels of engagement: engaging around the what, what the company does, the impact that it has; and then engaging around the how, how they do business. And I think of the ESG factors as the ‘how they do business’, we care about those, we think they’re important to engage on. Where I think we differentiate as an impact investor, is we’re interested in engaging around ‘the what company does’, it’s mission and purpose, or the culture in the company, and then the impact that it has and how the company can scale their activities, and increase their impact. And then finally, how they can measure and report on their impact.”
The Data Challenge
Impact measurement is hard enough in private publics, but in public markets companies are under far greater regulatory and legal scrutiny. This ensures a range of, mainly, financial data is made available, and it’s consistent. But when it comes to impact data, that can be far more difficult to find.
“It is hard to get data. I think we’re very early in this process, the measurement of impact, both positive and negative, is going to be one of the big trends of the coming years and decades. And I think we’re very early on that journey.” Kerry says.
“So in our impact report, you’ll see a lot of what I would describe as outputs, number of students that were educators, the number of affordable homes that were built, where we would love to get to is getting to the ultimate beneficiaries, and what was the impact on their life. What is the benefit of the affordable home? What is the quality of the home? How did it change their life?”
Inspire Australian Equities is one of the impact enterprises that will be featured at the Impact Connect showcase event on Tuesday 9th November.
Disclaimer: Kerry Series is a Director of Impact Asia Pacific, the parent company of OnImpact Media.
The full audio of the conversation, between Kerry Series and John Treadgold, can be found on the Good Future podcast.