Investment Committees are missing out in not considering impact investing in public equities
Investment Committees from any organization are faced with a continuous flow of decision-making ; but beyond typical decision lifecycles, an inflection point is approaching for many committees : how to integrate impact investing, not only in investment policies, but also in the organization’s culture.
To better illustrate this assertion, we need to go back to the basics of impact investing and start with the meaning of impact investing.
Definition of Impact Investing: It is an investment strategy that aims to generate both financial returns and positive, measurable social or environmental impact.
The Key Characteristics of Impact Investing are:
- Intentionality: The investor clearly intends to achieve a positive impact alongside financial gains.
- Measurability: The social or environmental outcomes of the investment are tracked and reported using clear metrics also called KPIs.
- Financial Return: Impact investments can target a range of returns—from below market rate to market-competitive—depending on the investor’s goals.
- Diverse Asset Classes: Impact investing can be done through most asset classes including equities, fixed income, private equity, venture capital, or real assets.
Impact investing starts with a theory of change (ToC) which is a detailed description that outlines the steps through which an investment is expected to lead to specific long-term goals. It maps the logical relationships between resources, activities, outputs, outcomes, and the desired impact
Impact investing is mostly understood as a way to achieve impact objectives based on some activities providing outcomes measured through a set of key performance indicators (KPIs), while still achieving a financial return that is either a market-based return or a concessionary return.
Impact investing clearly adds complexity to the investing world by adding a third dimension to consider when aiming to achieve a specific risk-adjusted return. Indeed, in a no-impact to-be-considered world, the objective of the investor is clearly to maximize return and minimize risk.
If we add impact to the equation, the investor needs to decide what needs to be prioritized and how impact will be considered in the investment process. Can we make great returns with little consideration to impact? Can an investment provide great impact but at the expense of returns? Can an investment provide great impact and simultaneously great financial return? All scenarios are possible.
Why impact investing is not and should not be considered as an asset class?
Impact investing was originally found in asset classes related to project financing, debt and private equities.
In credit financing, the role of the impact investor is more clearly understood when the money is spent as a way of financing a project (project financing) or through a debt issuance when the proceeds of that debt are used for specific outcomes directly linked to the impact objectives. In that case, investors can claim they bring additionality to the impact.
In the case of private equity, the concept of additionality can also be explained by the role of the private investor in driving the strategy of the investees (the operating companies) towards achieving the impact objectives.
In the case of public equities, if the principles of impact investing are to be applied correctly, then impact objectives have to be considered early in the investment process. Indeed, not all companies, through their operations, contribute directly to the Theory of Change outlined by a given impact investment product. That is why the Universe of eligible companies for an impact investment product is different from the traditional benchmarks or even the “sustainability” benchmarks like the MSCI SDG World Equity Index.
Once impact is confirmed, its scale should be tracked to ensure accountability for both portfolio managers and investees. These insights can guide active engagement—enabling investors to drive progress through targeted dialogues and the setting of KPIs. This proactive role enhances investor additionality, helping to accelerate impact beyond what companies would achieve on their own.
In Public Equities, how should an Investment Committee look at an impact investment product?
As mentioned earlier, impact investing is not an asset class; it is an investment strategy. Within that strategy, there could be different investment styles and objectives. Usually, public equity impact products focus on market risk-adjusted returns.
With impact in mind, the investment style is to focus on identifying the eligible companies aligned with the impact goals described in the theory of change of the impact investment product. In parallel, the portfolio manager has to focus on maximizing risk-adjusted returns within that universe of eligible companies.
What is relevant to keep in mind is that companies addressing unmet societal needs through innovative, impactful solutions are poised to capture meaningful growth in public markets. High-quality businesses with strong fundamentals can attract long-term capital, reinvest earnings to scale their impact, and build durable, compounding value for shareholders over time. Regardless of the theory of change of the impact investment product, there will always be companies that are “winning” and others that are “losing”. And it is also important to be aware that companies addressing specific impact solutions can be well positioned for being extremely profitable and bring great value for shareholders. The nirvana is then reached; the dual objectives of “great impact” and “great return” can then be achieved.
Through the Investment Committee lens, an impact investment product in public equities, should be considered as another investment style. Like portfolio managers offer value-based or growth-based investment style or other investment styles, impact investing in public equities is a specific investment style, long-term in nature, to be considered for style diversification in a public equity portfolio. Impact investing in public equities is more targeted than a classic sustainable investing investment product. Moreover, it can add long-term value creation to any institutional investors, and should not be only considered in the realm of foundations. As part of their fiduciary duty, Investment Committees should not ignore impact investing in public equities, on the contrary, they should embrace it.
