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Impact investing is coming of age as investors are increasingly attracted by its potential to help people and the planet, while still achieving competitive returns. But how does this work in practice? Our investment in a wireless-communication company in Africa illustrates how we seek to deliver impact within our digital divide theme.
Public markets offer a rapidly growing impact opportunity set that spans sectors, industries and market capitalisations. At Wellington, we focus on 11 impact themes in three categories:
Life essentials — clean water, health, affordable housing and sustainable agriculture & nutrition
Human empowerment — education & job training, digital divide, financial inclusion and safety & security
Environment — alternative energy, resource efficiency and resource stewardship.
Each impact theme offers a range of potentially attractive impact stories.
We require impact investments to be material, additional and measurable. That is, the majority of a company’s or issuer’s products, services or projects must align with one of or more of our impact themes (material). The core offering must address a need that is unlikely to be met by other entities or technologies (additional). And we must be able to quantify the impact the company or issuer is achieving based on a relevant impact thesis or “theory of change” (measurable).
Any potential investment must also offer the prospect of competitive financial returns. We conduct holistic research on a company or issuer and its sector, analysing financial fundamentals, the competitive landscape and environmental, social and governance (ESG) issues.
Closing the digital gap between the developed and developing world and between rich and poor populations within countries is one of our impact objectives and a key means of reducing inequality. The COVID-19 pandemic has accelerated the transition towards a digital economy and underscored how a lack of internet access can hinder social inclusion and economic empowerment. Without access to reliable digital services, many already disadvantaged people and businesses could fall further behind as we rapidly shift towards a digitally led economy and society.
We therefore look at financially attractive companies or issuers that can help bridge that divide through their core products or services. One such attractive investment opportunity is in Africa, where most countries rank lowest in the Economist Intelligence Unit’s Inclusive Internet Index3. We believe the company’s digital infrastructure and wireless communication services facilitate social and economic empowerment of underserved communities across Africa. Along with this impact theory of change, we also find the company’s financial fundamentals attractive.
To measure and track this company’s impact progress, we developed key performance indicators (KPIs) in line with the Impact Management Project’s4 Five Dimensions of Impact framework. These are:
What — what is the outcome and how material is it for stakeholders? This company helps to break down barriers to internet access, a meaningful impact outcome which translates into productivity gains and helps improve lives through access to digital technology.
Who — who are the stakeholders experiencing the outcome? In this instance, we measure the total number of customers gaining digital access (over 100 million), along with the number of customers benefiting from increased availability of financial services (over 50 million), and the number of countries reached (more than 50).
How much — what is the degree of impact of these outcomes? Here we focus on the number of homes and businesses receiving fibre broadband and the number of smart devices connected to networks as a result.
Contribution — has the company’s or project’s effort resulted in a better outcome than would have otherwise occurred? In this example, we assessed the reduction in price per gigabyte in the provider’s largest market (more than 50%), as well as the aggregate savings accrued to customers (more than US$180 million)
Risk — what is the risk that the impact will differ from or fall short of what was expected? The main risks we identified were underserved customers becoming less of a priority for the company and a drop-off in the quality of service. Our analysis found both risks to be low probabilities.
We overlay these KPIs with regular qualitative assessments of a company’s commitment to its impact goals. We seek to understand a company’s or an issuer’s holistic impact — looking at any negative externalities, such as environmental damage, associated with the company’s or issuer’s wider business activities, as well as any unintended negative consequences associated with the specific investment that would outweigh its positive impact, for example, the impact of a new recycling facility on local communities. For this company, we identified the environmental impact of its network of sites and the increased exposure of vulnerable populations to cyber-crime as the two main negative externalities. In practice, our analysis found the impact to be minimal, with the company undertaking appropriate action to mitigate that impact. The company also showed a willingness to engage with us on further mitigation.
While we do not manage our portfolios to a targeted level of alignment with the United Nations Sustainable Development Goals (SDGs), 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. In our view, the impact thesis for this company aligns with the goal of fostering industry, innovation and infrastructure (UN SDG9), and specifically Target 9.C within that goal, to “Provide access to the Internet”.
We also seek to ensure the fulfillment of our theory of change through informed and active ownership. In this case, our engagement with the company centred on securing disclosure on customer segmentation, customer satisfaction and affordability. Our engagements gave us conviction on the company’s commitment to increasing its scale and broadening its reach in rural and otherwise underserved populations across Africa.
Learn more about our impact investing approaches and explore further case studies:
1International Telecommunications Union, 2020. | 2Harald Edquist, et al., “How Important are Mobile Broadband Networks for Global Economic Development?”, Imperial College Business School, May 2017. | 3The Inclusive Internet Index 2021. Source: The Economist Intelligence Unit. | 4The Impact Management Project, impactprojetmanagement.com.
The example is for illustrative purposes only and should not be interpreted as specific security recommendations or advice. KPI data is based on issuer or company reporting, proxy data and Wellington analysis. | Wellington determines the goals and targets that, in our view, each portfolio company or issuer is aligned with. Language for the goals and targets has been abbreviated, but not otherwise altered, from UN.org. Wellington Management supports the United Nations Sustainable Development Goals. | Sources: Wellington Management, UN.org. Data is that of a third party.