LUXEMBOURG
JOHN WILLIAM OLSEN

Responsible investing has evolved considerably over the last ten years, progressing from simple ethical screens, to ESG, sustainability and more recently impact. While originally the preserve of private instruments, impact investing through public equities has been gathering steam, providing the much needed scale the market was lacking as well as diversification. In listed equities, impact is about achieving attractive financial returns while investing exclusively in companies that contribute positively to society and the environment. The positive impact has got to be material, measurable and reported.

Investor engagement

We find that small and mid-sized companies naturally lend themselves well to impact in listed equities as they are generally nimble and focused, avoiding the negative impact dilution that often comes when investing in large companies with more sprawling activities. Their small size and entrepreneurial culture can also be more conducive to fostering creative business models and innovative solutions that can help address the world’s biggest societal challenges, from, for example, climate change and pollution to education and healthcare access. We also find that the intent to drive positive impact is more prominent in young companies that were set up specifically for that purpose.

Investing in small and mid-caps also makes it easier to guide management and push for impact and disclosure. It is accepted that driving impact in listed equities is hard to achieve unless you own a substantial equity stake. This explains why impact investing in listed equities is more about the impactful nature of the companies themselves, via their products and services, rather than about the investor. However, investing in small and mid-caps, as opposed to large and mega caps, offers the advantage of being a relatively larger holder, which can allow for more meaningful targeted engagement.

Three opportunities

The M&G (Lux) Positive Impact Fund invests in a diversified range of companies whose products and services have a positive societal and environmental impact. It is a concentrated portfolio holding up to 40 companies from across the world, including emerging markets. It is diversified around six main impact areas: climate action, environmental solutions, circular economy, better health, saving lives, better work and education and social inclusion, all mapped against the Sustainable Development Goals. The fund currently has 30% invested in small and midcaps.

ALK-Abelló: better health, saving lives. The company leads in the treatment of allergies linked to grass and dust mites. It pioneered therapies in tablet and drop forms which are much better tolerated and less invasive than traditional injections. ALK-Abelló’s share price has risen by 16% in sterling since November 2018.

SolarEdge: climate solutions. This is a company whose technology helps promote the transition to a low-carbon world. It has developed a pioneering inverter that maximises the amount of energy generated from solar panels. In 2018, SolarEdge’s inverter systems generated 8.5 giga watts of electricity, roughly enough to power an economy the size of Ecuador. Since the M&G Positive Impact was launched November 2018, the share price has risen 17% in sterling.

Bright Horizons: social inclusion. The company is a leading provider of high-quality child care and early-education services. Its extensive network of over a thousand centres allows women to re-join the workplace in the knowledge that their children are given the best possible care. Shares in the company have gone up by 9% in sterling since November 2018.