Most investors want to achieve positive long-term returns. But many also seek to achieve more than just profit by investing for impact. But how does it work and can it make a difference? Here we take a closer look at impact investing and how our approach can help create a measurable positive impact on society and the environment.
Impact investing involves directing capital towards companies that are intentionally developing products and services that contribute to measurable positive social and environmental outcomes, alongside positive financial returns.
The world’s needs are vast. However, the United Nations provides a framework to help prioritise them. In 2015, all United Nations Member States adopted its 2030 Agenda for Sustainable Development and 17 Sustainable Development Goals (SDGs). These are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.
The SDGs are informing government policy and guiding public investment and development. However, governments cannot achieve these goals by working in isolation. According to the UN, it will require around US $5-7 trillion annually to meet its Agenda. As a result, the SDGs have rapidly become a call to capital for investors and asset managers alike.
At Aberdeen Standard Capital, we incorporate these goals into our impact investment process. We invest in companies for the long-term with the dual aim of delivering financial performance and positive social and environmental outcomes. We use the UN’s Agenda and SDGs to guide our impact process and to define specific social and environmental objectives.
Our approach identifies companies that are adopting strategies to intentionally produce products or services that address these goals. We seek companies that go beyond operational improvements, such as reducing their carbon footprint, to apply mission-driven objectives. We focus on companies who show intentionality through their investment as well as those with operating models designed to achieve measurable positive outcomes.
We measure the impact these companies have by mapping their output and outcomes to the key performance indicators that underpin each of the UN’s Sustainable Development Goals, i.e. this approach offers evidence based integrity.
The 17 SDGs are integrated, as action in one area will affect outcomes in others, and development must balance social, economic and environmental sustainability. We cannot neatly tackle complex challenges in isolation, so the focus must be on systems, causes and connections between them.
We believe there are three key themes that run through the 17 SDGs: climate change, social inequalities, and unsustainable production and consumption.
The right climate for change
Climate change is a pressing problem for the world, with significant consequences and challenges. This is one area of particular focus for us. Companies have a central role to play in developing alternative, affordable energy solutions and products that reduce climate change impacts. They also have a responsibility to make their own operations as resource-efficient as possible.
We consider three areas of energy: clean energy solutions, initiatives that promote energy efficiency, and services to expand access to energy. We look for unmet needs using the World Bank Database to identify countries and regions with low penetration of sustainable energy products and services. Our aim is to invest in companies that target areas where there is a demonstrable gap in services. We also need to see evidence that they are providing useful and affordable products and services to meet that region’s needs.
With this in mind, some of our investments include companies developing batteries for electric vehicles and those providing componentry for solar power generation. We also favour businesses that are installing grid networks to support renewable energy distribution, as well as utilities that generate renewable energy. These business models help avoid carbon emissions and expand renewable energy capacity globally.
Food for thought
Another example of our impact process in action is our approach to the food and agriculture industry. Here, our twin focus is to address hunger and nutrition, as well as promote the sustainable use of the world’s resources.
We therefore look at access to nutrition and improved nutrition, and services for farmers. We also assess how food is produced and the impact of farming practices on the land, water and biodiversity.
All this involves managing risks around genetic modification, antibiotics, working conditions and human rights. It also requires a focus on environmental concerns such as biodiversity and land degradation.
Getting into impact
For those investors interested in the benefits of impact investing, we offer our impact strategy on either a segregated or pooled basis, with a choice of three risk levels. We construct the portfolios with our highest conviction long-term investment ideas, which we identify using a bottom-up stock-picking approach. If required, we can reduce equity risk by adding traditional diversifiers such as government and corporate bonds.
We also offer a newly launched Sustainable Managed Portfolio Service range. In the portfolios, we assign a proportion of the equity allocation to companies creating a measurable positive impact on society and the environment.
To find out more, please get in touch with your usual contact at Aberdeen Standard Capital.