PI Partnership – Aon
gress towards their stated environmental and social aims. Put another way, impact investing is more than merely excluding ‘sin stocks’ from investment portfolios. It is about invest- ing in well-run companies that provide products and services that positively impact the world around us.
Oliver MacArthur is Aon’s impact research lead, while Geri McMahon is head of respon- sible investment solutions.
IMPACT INVESTMENT: CAPITAL AS A CATALYST FOR CHANGE
The economic environment, financial markets and asset prices are all increas- ingly influenced by global megatrends, such as climate change, shifting demo- graphics, the rapid advance of technology and digital communications, and political tensions worldwide. At the same time, in- vestor awareness and appetite to address environmental and social issues through pension scheme investments is rising. Protecting and securing the retirement income of employees and scheme mem- bers will, more and more, need to take account of these influences — impacting the investment decisions, fund offerings and member engagement strategies that trustees and sponsoring employers may adopt in future. Impact investing is one way in which to meet these challenges. Designed to pro- vide investment returns while driving positive, sustainable outcomes for society and the planet, impact investments differ to traditional investments by having dual objectives against which they are meas- ured: they are required to deliver a return on capital and make demonstrable pro-
The case for impact investing Global megatrends pose long-term chal- lenges, and opportunities, that will reshape the world, societies and econo- mies of the future. These challenges include tackling climate change, increas- ing access to quality education and afford- able housing, enabling financial inclu- sion, advancing healthcare innovation, alleviating hunger and poverty, as well as driving renewable energy growth. Allocating capital to companies whose products and services address these chal- lenges can play a significant role in shap- ing the future for good. For example, cap- ital flows to impact investments with stated ‘climate action’ goals have the potential to play a significant contribution to meeting the climate change crisis. The IPCC suggests that investments in green projects to the estimated value of $2trn (£1.4trn) per annum, over the next 20 years, are needed to successfully tackle the crisis.
In addition to driving measurable and positive responses to these challenges, impact investments offer the potential for competitive risk-adjusted returns. Organ- isations with a positive impact on envi- ronmental and social outcomes are increasingly considered to be better posi- tioned to benefit from improved manage- ment of ESG risks and to bolster econom- ic and market performance. In its Annual Impact Investor Survey 2020, the Global Impact Investing Net- work highlights that 88% of respondents report meeting or exceeding their finan- cial expectations and over two thirds of respondents seek risk-adjusted, market- rate returns for their assets.
The potential benefits flow from being part of the solution – and, as new oppor- tunities arise, driven by regulation, inno- vation and consumer preferences, the val- uation of financial assets will likely respond.
Exploring opportunities in pub- licly traded equity Pension scheme investors should look to actively engage with impact investing and seek out those investment opportunities which offer the rewards of risk mitiga- tion, financial returns and impact. Public equity investment approaches are becom- ing increasingly prominent and are democratising impact investing beyond private markets. Public equity impact investors can benefit from diversified equity portfolios investing across a broad and liquid investment universe in devel- oped and emerging markets.
As public equity markets increasingly focus on sustainability issues to price companies alongside their financial char- acteristics, early adopters could expect to benefit from a favourable tailwind to financial returns over the medium-term. As well as growing concerns over global megatrends and corporate transparency, increasing regulation and policy actions are beginning to influence investor pref- erences and momentum is building in terms of innovation and the available solutions offered. The changing market dynamics
are increasing demand for
companies aligned with a more sustaina- ble future while lowering investment demand for unsustainable companies and increasing their cost of capital. Impact investing offers the opportunity to deliver a ‘win-win’ for portfolios, people and the planet. It is important for trustees to understand how their publicly traded equities could be invested in a more impactful way and the potential financial advantage on offer.
Issue 100 | February 2021 | portfolio institutional | 31
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