Impact in focus: through the lens of public markets

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Sustainability inspires podcast by abrdn.

Fionna Ross

Hello and welcome back to the podcast. I'm Fionna Ross, Senior Sustainability Investing Specialist in the abrdn Sustainability Group.

In this episode, we'll be discussing the theme of impact investing in the public equity space. My guest today is Sarah Norris, Head of ESG in the abrdn Developed Markets Equities team and Global Impact Equity Fund Portfolio Manager.

Welcome to the podcast, Sarah.

Sarah Norris

Thanks, Fionna. It's great to be here.

Fionna Ross

And it's so great to have you join us today. So, Sarah, we've known each other for a number of years now, and it's been great following the work that you and the team have been doing on the impact investing side.

So, to start off, could you tell us a bit about impact investing? You know, there's been a lot of debate, for example, around authenticity. What would you say defines authentic impact investing and what are its essential components?

Sarah Norris

Yeah, I mean, as you say, impact investing as a style has been around for decades, probably even longer. And I think the term was first coined by the Rockefeller Foundation in 2007.

And so, there's a consensus around the definition that it's investment intentionally targeting positive, measurable social and or environmental outcomes alongside financial returns.

There's less, I guess, agreement on how this is delivered and achieved in the in the types of impact as well as the asset classes. But for me, authentic impact investing has to focus on the definition.

So, it has to have intentionality and you have to have impact measurement. And increasingly what we're seeing is that authentic impact investing has to have some kind of framework, which typically is a theory of change.

So, so thinking about what are you investing in, what is that investment going to do? What type of impact is being targeted? And then how are you going to be able to measure that impact and understand it against those real-world outcomes?

And through that you have intentionality, which is an explicit intention to affect real world change.

I think authentic impact investing doesn't happen by accident. It's an intentional choice. And then the measurement piece making show that we can hold all impact managers to account.

Fionna Ross

Okay, that's a great response. Thanks, Sarah. And I think that aspect of intentionality, that's something that we certainly hear a lot when we're talking about impact investing. And on the measurability side as well, we'll get to that in a minute.

I actually have a question on that later. So, we also, we often see debates around impact investing in the public market space. You know, can it really be impactful as for example, private markets.

So how do the influencers of impact investing compare between public market investing and private market investing, particularly in terms of additionality and the actual direct impact on beneficiaries?

Sarah Norris 

Yeah, that, it's a great question. It's one we get a lot. And I think well, I said I am an impact manager in public markets. So of course, I'm going to say that you can have an impact through public markets.

I think 20 years ago, 30 years ago, impact investing was mainly in philanthropic pursuits then it moved into private markets.

And it's now more recently come into public markets. And for me, the difference between public or private impact investing isn't the type of impact that's delivered because at the end of the day, if you're the end beneficiary.

So, if you are the person receiving an education outcome, you don't care if the money that is financing the products that you're using is coming from a private investor or a public company, you're more focused on the results that you're going to be getting.

So, I think we have to look at it from the beneficiary’s perspective and say there's little difference for them. Where there is differences, is around the level of additionality. And additionality is it's an impact concept.

And what it essentially means is, is the capital that's being provided to a specific project or to a specific initiative, additional. And what that means is what this project have happened without that capital.

So, is this new capital? And in private markets, you can 100% say yes, the capital is additional, and you have a very high level of additionality.

You're providing new finance to a project that probably wouldn't succeed or get off the ground without that capital, and the capital is essential. In public markets, these companies already exist. So, us buying shares on the market isn't an additional investment into a project.

What we are doing is we're funneling capital away from potentially negative impact type businesses into public companies that are having a positive impact, and you're hoping you're shifting the direction in the market.

But at the end of the day, the level of additionality isn't there. The additionality that we can have as investors and public markets is we can influence companies around disclosure.

We can influence companies around how they project their message and also hold them to account when it comes to reporting and measurement. But it is a different type of additionality, and I think that's important to recognise.

Fionna Ross

Great. And again, in this case, additionality seems to be the word of the moment, when we're talking about this.

Join us after the break, we're we'll be chatting more on the challenges around measuring impact.

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Sting

Sustainability inspires podcast by abrdn. 

Fionna Ross

Welcome back to Sustainability inspires, where I'm joined by Sarah Norris and we're discussing impact investing.

So, given the challenges in measuring impact, which we touched on earlier, why is measurement critical to impact investing and how can investors distinguish between genuine impact and greenwashing?  Is this this even possible to do?

Sarah Norris 

Yeah, I guess so. That's two questions and one. So maybe I'll take the first on, measurement and we have to remember that impact investing has investing at the at the end of it.

So, we are looking for financial returns. And it's easy to hold an income fund to account because you can understand the different types of income, there are very clear financial metrics.

When it comes to impact, there aren't pre described impact metrics that every single impact fund uses, which is why it's so important that every impact fund has an annual report of some sort that goes through the metrics that they're looking at when they're defining impact and what success looks like.

So, when you're defining between genuine impact and greenwashing, impact measurement is an essential part.

And what I always say to clients is I've got six questions that I would recommend they ask when trying to pick an impact manager, and also trying to understand if an impact manager is really delivering impact or is maybe more on the sustainable side of things.

The first is how is positive impact defined? So, impact can be social or environmental.

It can be a combination of both. Understanding how the asset manager defines positive impact is essential, and understanding where they are intentionally allocating capital and where that intentionality comes from.

So, in public markets at abrdn, we use the Rockefeller Foundation’s definition. We intentionally allocate capital to businesses whose products and services have a measurable impact.

And we're looking at the Sustainable Development Goals to help us define that positive impact and those areas of unmet need.

The second question is what is the fund's objectives? How is success achieved and what impact are they looking for. And this allows clients to hold us to account.

So, for us, we've taken the SDGs into an impact framework of eight different themes for environmental and for social. So, we're looking for that blend. Other funds may have environmental only or social only.

There's no right or wrong. But I would urge clients to say what are my impact objectives? And does the fund's impact objectives align with mine, and are they defining impact the same way?

Are they looking at products and services or are they looking at operations? Again, no right or wrong way, but you need to make sure that there's that alignment.

The third question is incredibly important. And it comes back to something I've already mentioned. And it's how does a manager identify, assess and manage impact investments? What's their framework? What's their process? There are multiple different approaches.

You could look at the Global Impact Investing Network or the Impact Management Project for different frameworks. But a common component that you see across public and private is the use of the theory of change.

This is a concept that comes from the development space, and it is an outline of the issue and a plan to address the issue, including a set of key performance indicators to track a project.

Essentially looking at what are your inputs, your activities, your outputs, and your outcomes. An authentic approach to impact investing should probably have a theory of change or something similar to identify, assess and manage the impact investments it's making.

My fourth question is how does the manager identify, avoid, and mitigate negative impact? So here, when you're thinking about negative impact, a client might hear the term negative externalities or similar jargon.

But what we're essentially doing is saying how does the manager think about risk? How does the manager think about risk internally so that the company may do something that offsets the positive impact or there might be some external influence?

So, an example is you're looking at sustainable energy and potentially a hydroelectric dam. Is this hydroelectric dam being built in an area that's displacing an indigenous population? Have they thought about the biodiversity impacts?

These are types of negative externalities that the company can and should be thinking about. And you, as the manager, should also be asking the question about how the company or the asset is dealing with these issues.

Things will go wrong. No investment is always going to be 100% perfect. And so, what I would want to understand is how does the manager react? What do they do when things go wrong?

What did they learn and how did they then reflect these learnings in future investments? And how do they also reflect these learnings back into the asset they're investing in?

My fifth question is, is how is the progress of each investment monitored? A manager shouldn't invest in an asset and then just forget about it. You should have a system in place to monitor progress.

At abrdn, we've set up the Impact Management Group with key experts from our Sustainability Group, and they interrogate each asset's theory of change at least annually.

And we're reviewing the impact assessed. We're looking at potential risks, negative externalities and ultimately ensuring that impact is on track. Some system for regular monitoring is essential, in my opinion.

And my final question is around reporting how is impact reported? And what I would urge clients to look for is that the impact measurement is aligned with the impact objective.

So, measurement and management of impact assets is not well defined. As I've said, it's not nearly as well defined as traditional performance metrics. So, it's essential to make sure that there's that that bridge.

So, at abrdn, what we're essentially doing with impact investing is we're looking for local solutions to global problems as defined by the SDGs. Our impact report then shows local solutions to global problems.

We are identifying the microfinance businesses and how they're transforming access to finance in Mexico and Indonesia. We're putting the impact in context because that is our objective, showing how companies can help countries meet the Sustainable Development Goals.

And having that objective and then very clear measurement framework and approach allows our clients to hold us to account. And I think that's essential when thinking about genuine impact versus greenwashing.

Fionna Ross

Thanks, Sarah. And I think the six questions you outlined are a really helpful framework. So, thanks very much for sharing. And I've certainly been taking notes at this end. And the examples of really helped bring some of these to life.

So that's great. Well, I think that's all we actually have time for today. So, Sarah, thanks so much again for joining us today.

It's been a great conversation and thanks to you, our listeners. If you missed any episodes, you can find us on all the usual podcast platforms such as Spotify and Apple, as well as in the abrdn website. Until next time, stay inspired.

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