Impact investing in public and private markets: similar but with important nuances
Based on our own impact investment experience since 2015, we believe that both public and private markets have an important role to play in portfolios, but there are some nuances to be aware of. Traditionally, investors have been mainly drawn to public markets for scale — including the ability to scale for a given theme, the market liquidity and the greater company transparency. Investors favouring private markets have tended to do so because of the ability to go deeper in targeting specific issues, groups or geographies, often with a focus on localised issues. Recent innovations are, however, blurring those lines. For instance, in labelled bonds, we are now able to acquire much greater transparency on the outcomes, end-beneficiary and location that an issuer is focused on, while the advent of single-theme solutions means that investors can increasingly become more targeted in public markets as well. These positive developments will, in our view, encourage investors to tap into both public and private markets.
We see two important remaining differences:
Additionality: within an impact framework, additionality is the way in which a targeted positive outcome is delivered to ensure it meets an unmet need that cannot be otherwise delivered. In private markets, investors can play a significant role in fostering that additionality, including potentially taking a seat on the board, while in public markets, this is mainly achieved through engagement, which is an area where we take a very active role. As a first step, however, we seek additionality at the investment stage by concentrating on companies that are providing a product or service that can help fulfil an unmet need such as, for example, the provision of financial services to vulnerable and hitherto excluded groups.
Availability and use of data: while public companies are increasingly able to provide data, even if there are still challenges with the accuracy and quality of the data, private companies have fewer data resources at their disposal. We seek to overcome this challenge by undertaking proprietary research and sharing the resulting insights with portfolio companies as well as by fostering greater research collaboration across the industry.
Grassroots research is crucial in emerging markets
While we apply our impact framework across both developed and emerging markets, we find that there is a somewhat different opportunity set in emerging markets. For instance, in the aftermath of the COVID pandemic, we see a real tilt towards connectivity and health care in Asia. At the same time, the situation on the ground can vary greatly across emerging markets and we think grassroots research — including with end-beneficiary — is critical to identify unmet needs and opportunities and to build a robust impact framework to monitor and measure progress towards set financial and impact goals.
Finally, when looking at impact in the context of emerging markets, we believe investors should not overlook the indirect exposure they can gain through developed companies as many of these now have significant revenue exposure to emerging markets. Many of the products or services they provide may still originate in developed economies, but the impact is increasingly delivered in emerging markets.
Further impact education is critical
In our view, this involves greater internal training for stakeholders across the entire value chain but also more effective knowledge sharing among the industry across the E, S and G components.