The what, where and how of impact investing

Campe Goodman, CFA, Fixed Income Portfolio Manager
Tara Stilwell, CFA, Equity Portfolio Manager
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What is impact investing?

Impact investing provides funding to companies and bond issuers actively addressing the world’s major social or environmental challenges. Impact investors like us intentionally direct capital with the aim of generating positive outcomes for people and the planet while seeking to deliver competitive investment returns.

Where do you find impact investment opportunities?

We focus our research on 11 impact themes, centred on life essentials, human empowerment and the environment. Life essentials covers affordable housing, clean water and sanitation, health and sustainable agriculture. Human empowerment seeks to address the digital divide, education and job training and financial inclusion as well as safety and security. The environmental category encompasses alternative energy, resource efficiency and resource stewardship.

How do you define a company as “impact”?

To be considered for our impact funds, each potential investment must meet a high bar of alignment with our impact themes. The impact case must be material, with the majority of a company’s revenues or business activities advancing one or more of our themes. The impact of the potential investment must also be additional, addressing a specific need that is unlikely to be met by other agents, be it competitors, governments or non-governmental organisations.

We believe it is also important to understand a company’s or an issuer’s holistic impact. For example, with green bonds, we scrutinise not just the use the bond’s proceeds will be put to, but also the issuer’s wider business activities. With government bonds, we only invest where the proceeds are being used specifically to address one or more of our impact themes. We also assess any potential investment for unintended negative consequences that would outweigh its positive impact — for instance, the impact of a new recycling facility on local communities or the environmental implications associated with the data storage involved in digital solutions.

Finally, the impact case for each investment must be measurable so that we can quantify and report on its progress over time. We believe investors must be able to analyse, track and measure impact outcomes as thoroughly as they do financial outcomes. We also believe this transparency helps encourage much-needed capital to be directed towards impact companies and issuers.

How exactly do you measure impact?

To measure impact, we create custom key performance indicators (KPIs) for each company or issuer in our portfolios. The KPIs will vary depending on the security, sector or impact theme, but they must all be logical, transparent and based on reliable information, such as science-based insights from our climate research team. For example, we may measure the amount of greenhouse gas emissions avoided by recycling waste instead of sending it to landfills or the percentage of a population provided with clean water, internet access or affordable housing. In addition to monthly publications on our funds’ financial performance, we publish annual reports on KPIs and the impact of our holdings.

How do you address the UN SDGS?

When the United Nations (UN) published its Sustainable Development Goals (SDGs) in late 2015, we were pleased to see how well our themes aligned. Today, between our impact equity and bond approaches, our investments address all 17 SDGs, either directly or indirectly.

For each company and issuer in our portfolios, we tag the goals that we believe they align with, as well as any of the 169 underlying targets outlined by the UN. While we do not manage the portfolios to a targeted level of alignment, our high standards for inclusion result in an investment strategy that naturally supports many of the SDGs. All the companies and issuers we invest in offer what we consider to be much-needed solutions to many of the major challenges identified in the SDGs. Wellington is proud to continue supporting the UN SDGs.

Which asset class is most suited to impact investing: equities or bonds?

Both equities and bonds provide excellent opportunities for impact investing, with large and growing opportunity sets. In fact, we believe the two asset classes provide complementary impact exposures and can be blended within a broader portfolio to create compelling synergies. Some themes are easier to access for fixed income managers, such as affordable housing bonds issued by local housing associations. Other themes, such as financial and digital inclusion, are more accessible for equity managers.

What about financial returns?

We believe impact investing does not entail giving up return potential. Both the Wellington Global Impact Fund and the Wellington Global Impact Bond Fund aim to deliver competitive returns for clients alongside positive social and environmental outcomes. All our impact investments must meet specific financial thresholds to be considered for inclusion in our portfolios. In our view, many of the companies we target also benefit from structural tailwinds given their focus on products and services that seek to address some of the world’s most pressing issues. Companies that can provide effective solutions to those problems are likely to see healthy growth in their revenue and market share in the years to come.

How do you bring it all together?

After defining the universe of potential investments that meet our impact criteria, we focus on selecting the best combination of securities to reach our financial objectives, via bottom-up research. Key to successfully building and managing portfolios, in our view, is our multi-disciplinary approach. We regularly integrate the insights and perspectives provided by Wellington’s global teams of experienced research professionals across industries, asset classes and investment styles. This includes close collaboration with our career credit analysts and industry specialists, who provide detailed insights at the security, industry and sector level. We also draw heavily on the expertise of our dedicated ESG research and climate research teams.

How do you approach engagement?

We seek to enhance both the impact and the financial value of our portfolios further through active engagement with company management teams and boards. Engagement helps us identify opportunities for companies to improve, measure and report on their impact activities. It also allows us to report more meaningful data at the issuer and portfolio level. Ultimately, engagement creates an important feedback loop and mechanism to help us deliver and measure impact.

What is so attractive about impact investing?

Impact investing is an exciting space where we get to help clients align their financial objectives with social and environmental aspirations. We are committed to helping investors appreciate the potential benefits of directing their equity and fixed income allocations towards solutions that help people and the planet while pursuing their investment goals.


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Authored by
Campe Goodman
Campe Goodman, CFA
Fixed Income Portfolio Manager
Tara Stilwell
Tara Stilwell, CFA
Equity Portfolio Manager