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Evolving impact investing for better potential outcomes

Multiple authors
2022-09-30
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

We continue to evolve our approach to impact investing in response to major trends, including the ongoing global pandemic, intensifying effects of climate change, and the shift to digital ways of living and working. As consumers increasingly see the value of solving major social and environmental problems for the benefit of people and the planet, companies and issuers have been incentivized to innovate and offer solutions. The result is an expanding public-market impact opportunity set.

We believe our approach of investing across 11 impact themes puts us in a strong position to capture promising new impact investing opportunities across developed and emerging markets. Our impact themes fall into three categories:

Figure 1
evolving impact investing for better potential outcomes fig1

In our digital divide theme, we anticipate significant long-term demand for technologies addressing widening digital inequality across developed and emerging markets. In our health theme, we are finding more companies and issuers looking to solve health-care-related challenges such as access to affordable care, inefficiencies in service delivery, and chronic underinvestment in delivery and health care infrastructure.

Today, the humanitarian crisis continues to unfold in Europe following Russia’s invasion of Ukraine. This tragedy is an urgent reminder for countries to reduce their dependency on fossil fuels and increase their focus on energy security and renewables. We expect impact companies in the alternative energy and resource efficiency spaces to see accelerated demand as governments redouble their efforts to diversify energy systems.

The challenges associated with climate change more broadly remain a primary impact focus. Wellington’s ongoing research with our climate-science partners at Woodwell Climate Research Center underscores the urgent need to boost climate resilience. Solutions to protect life and property from the effects of climate events cross several impact themes in life essentials, human empowerment, and, of course, environment.

Strengthening our engagement approach

Across our impact strategies, we are committed to setting a high bar for materiality, additionality, and measurability. Through engagement, we seek to support our theory of change for each investment we make. We also encourage companies to establish key performance indicators (KPIs) demonstrating positive social and environmental impact. In 2021, engagement remained a vital part of our investment process. The equity team held 224 engagements with 80 portfolio companies and 65 additional engagements with potential candidates for the portfolio. This was a 90% year-over-year increase. In our fixed income strategy, we favor issues that incentivize issuers to improve their sustainability profiles and set targets with associated metrics. Our engagements provide valuable and additive insight into issuers’ strengths and weaknesses. These discussions also help us confirm whether issuers are delivering impact and have the potential to generate strong long-term financial returns. We believe ongoing engagement with companies and issuers can help enhance their positive impact and create lasting value for our clients.

Enhancing impact measurement and management

Impact measurement and management (IMM) is a core component of our investment process and critical for evaluating a company or issuer’s holistic impact. As data availability has expanded, industry standards have improved, and interest in impact investing has accelerated, we have enhanced and formalized our IMM processes. During 2021, we hired Oyin Oduya as our IMM Practice Leader. As a dedicated resource, Oyin’s remit is to ensure consistent, high-quality impact data collection and analysis. The IMM Practice team has worked to improve existing approaches; for example, developing a new framework with the impact bond team to analyze impact risks and opportunities in multilateral development banks. The IMM Practice also took an active role in company engagements in 2021, deepening our insights into how products and services contribute to our impact themes and sharpening discussions with management teams about how they measure the social and environmental outcomes of their activities.

Reporting alignment with the United Nations Sustainable Development Goals

Wellington supports the 17 UN SDGs and believes the financial services industry has an integral role to play in bridging the funding gap to achieve them. While we invest in companies and issuers that align directly with our proprietary impact themes, we also denote the relevant SDG and target to which they contribute to better contextualize their activities alongside the great work being carried out by other financial, government, and nongovernment organizations. Increased reporting by asset managers on alignment with the SDGs facilitates the assessment of capital allocation to fund progress toward these critical outcomes. We tag the underlying target to which a holding most closely contributes where applicable. While some of our impact themes are not directly captured by the SDGs, in our view, they indirectly address several critical goals.

Expanding impact in emerging markets

Launched in January 2021, our emerging markets impact strategy is the most recent addition to Wellington’s impact platform, joining our global impact equity and bond strategies. The approach aims to outperform its equity universe by investing in innovative companies focused on emerging markets, whose core goods and services address large social and environment challenges across our life essentials, human empowerment, and environment categories. Portfolio Manager Liliana Castillo Dearth takes a bottom-up investment approach, informed by on-the-ground grassroots research. Liliana believes that, in addition to traditional fundamental research, it is critical to understand domestic markets from within, including cultural settings and the hopes and aspirations of local business owners and consumers. Liliana and her team travel to emerging markets each year to identify and assess new impact opportunities.

We look forward to generating positive impact and competitive investment returns for our clients in 2022.

Important disclosures

The views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. The material and/or its contents are current as of 31 December 2021. Forward-looking statements or estimates may be made. Actual results and occurrences may vary significantly. Certain data provided is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness.

Investment risks

All investing involves risk. If an investor is in any doubt as to the suitability of an investment, they should consult an independent financial adviser. Past results are not necessarily indicative of future results and an investment can lose value.

Please refer to the investment risks page for information about each of the following risks:

  • Asset/mortgage-backed securities
  • Capital
  • Concentration
  • Credit
  • Currency
  • Equity markets
  • Fixed income securities markets
  • Foreign and emerging markets
  • Interest rate
  • Real estate securities
  • Smaller-capitalization stocks

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