- Last month, US asset manager Vanguard launched its first impact fund, which invests in listed equities, fuelling debate over whether such products achieve genuine impact.
- In 2020 listed equity funds represented around a third of the impact investment universe and were the fastest-growing area of the sector, according to the Global Impact Investing Network.
- The managers of the five biggest listed equity impact funds appear to make a credible case for having an impact, but new entrants will be under pressure to demonstrate their credentials.
Last month Vanguard, the world’s second biggest asset manager, unveiled its Global Positive Impact Stock Fund, fanning the flames of debate over whether listed equity products really qualify as vehicles for impact investment – effectively, allocating capital with the aim of creating a specific positive environmental or social impact as well as a financial return.
Public markets accounted for a material chunk of the $715bn of impact capital invested (34%), and public equity and debt were two of the fastest growing asset classes in the space, according to the latest Global Impact Investing Network (GIIN) survey, published in June 2020. The survey indicated that public equity assets recorded the fastest annual growth rate (33%) between 2015 and 2020.
GIIN, which has a listed equities working group and says public market investment has the scale and potential to help close the $2.5trn shortfall in funding the UN-backed Sustainable Development Goals (SDGs).
Similarly, London-based WHEB Asset Management, which runs a public equity impact fund that launched in 2007, argues that impact investment in public markets does have an impact in that it lowers the cost of capital for impactful companies and helps socialise and scale impact.
And, last year, US-based Engine No.1 demonstrated the potential impact one that investors can exert through public markets after its successful campaign targeting ExxonMobil. The hedge fund manager, which describes itself as an impact investment firm, got two climate-competent individuals onto the board of the energy major despite owning only 0.02% of its shares.
Rising scepticism over stock impact funds
Yet given the lack of an official or regulated definition of impact, more products are – understandably – likely to use this label and the positive connotations that come with it. Since just the start of last year, 39 funds with impact in their title that invest in listed equities have launched, accounting for nearly a third of the roughly 130 such products on the market, according to Morningstar.
In fact, the new Vanguard product – which is managed by Scottish active equity fund house Baillie Gifford and has $160m in assets – was the Baillie Gifford Positive Change Equities Fund before being reorganised and renamed.
Accordingly, there is scepticism about this trend in some quarters.
In an email to Capital Monitor, the US Impact Investing Alliance agreed that public equity investment will be needed help meet the SDGs, but said pursuing impact through the public markets will be challenging.
The Operating Principles for Impact Management – an initiative developed by the World Bank’s International Finance Corporation – says its framework can be applied to both the public and private markets. However, it adds, establishing a credible thesis that explains how an investment contributes to the achievement of impact is usually easier to establish for private asset strategies, where the investor and/or the additional capital has direct engagement with the investee enterprise.
This is in line with a frequently cited argument that buying listed equities, unlike private market investment, typically involves little or no direct engagement with management and does not contribute new capital. Hence, it’s hard to prove ‘additionality’ – that the impact would not have been achieved without the extra investment.
Similarly, there are concerns over potential ‘impact-washing’ in the biodiversity space. Roel Nozeman, senior adviser on biodiversity at Dutch firm ASN Bank, says it is not possible to invest in most listed stocks and have a positive impact on biodiversity. “From our experience with ASN Bank’s biodiversity footprint, we know that almost all listed companies have a net negative impact on nature,” he adds.
And even as early as 2018, Paul Brest, a faculty director at the Stanford Centre on Philanthropy and Civil Society, advised in a paper on the subject that investors should “treat the presence of any public equities in a self-styled impact fund as the thirteenth strike of the clock, which calls the [other funds] into question”.
Five biggest impact funds: holdings and approach
Capital Monitor decided to look at the five biggest listed equity impact funds by assets, according to Morningstar data, to assess how they measure impact investing in public equities (see list below). We gave them a working day to come back with those funds’ top holdings, a brief description of their investment thesis and their frequency of impact reporting.
Popular choices of companies for inclusion were those involved in the renewable energy industry (Denmark’s Vestas Wind Systems and Swedish-Swiss engineering group ABB), safety equipment maker UK-based Halma, and Swedish heating technology firm Nibe Industrier. Other interesting points to note are that the five funds’ exposure was much bigger to developed markets than developing ones, and that China is way down the list despite the size of the market (and its solar components industry, for instance). (See charts showing holdings by geography and popular stocks below.)
The largest fund is BNP Paribas Funds Climate Impact Privilege Capitalisation, which has around $3bn in assets and is run by Impax Asset Management. It did not respond to enquiries so Capital Monitor gleaned information from the public domain. Impax reports annually on the environmental impact of the fund using metrics such as net CO2 emissions avoided or water saved, treated or provided.
Natixis Investment Managers, which offers the second biggest listed equity impact fund, said it could not respond to enquiries in time. Mirova, the manager of the Natixis Impact ES Actions Europe fund and a Natixis IM affiliate, reports on the impact of its impact fund range annually. The fund’s factsheet shows how much its holdings contribute to the SDGs and its estimated impact on temperature rises, both in comparison to its benchmark.
New York-based Domini Impact Investments, which runs the Domini International Opportunities Fund, reports on impact annually and quarterly, it told Capital Monitor. The firm’s annual report illustrates the impact of each of its funds. It provides information such as how carbon-intensive a portfolio is compared to its benchmark, and what percentage of a fund has set science-based targets.
Using engagement
Domini’s quarterly report provides a snapshot of engagement over its whole impact fund range, and interesting details for individual funds. The firm also measures alignment to SDGs both quarterly and annually.
Claire Dorey, director of marketing and communications at Domini, says one way it seeks to create impact is through engagement, and it will disengage if companies do not improve impact, without providing more detail.
Boston-based Wellington Management said it could not respond to Capital Monitor’s enquiries in time. It reports on the impact of its whole fund range annually, according to its 2021 impact report. The firm illustrates alignment to the SDGs, incorporating metrics such as greenhouse gas emissions avoided, as well as details of how it approaches impact measurement and management.
Wellington also has an impact steering group that highlights potential issues for the fund. For example, it notes that China is home to around 80% of the global solar components industry, raising the point that the question of human rights, including forced labour in supply chains, must be weighed against the positive climate impact of solar power.
Baillie Gifford runs the fifth biggest public equity impact fund under its Positive Change range of products, which also includes Vanguard’s new launch and reports annually on its impact.
Rosie Rankin, client director at Baillie Gifford, says it reports on the product impact for every company in the fund’s portfolio and maps each company to the SDGs at an underlying target level. It also maps the overall portfolio to the SDGs and discloses any negative contributions to the SDGs through company’s products and services. KPMG provides assurance over the impact report.
Baillie Gifford also puts out an annual engagement report. As to whether it would divest a company for not meeting impact targets, Rankin said by email: “Ultimately, we will sell a company if we lose conviction in its ability to meet either of our dual objectives (investment and impact) over the long term.”
These five well-established funds may state a credible case for exercising positive impact, though some will disagree – and as the impact investment universe grows, the pressure will be on newcomers to demonstrate genuine impact credentials.
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