November 23, 2020 / Positions and Papers

Solving today’s global environmental and social problems demands a combination of money, long-term thinking and innovation. We believe that the United Nations’ 17 Sustainable Development Goals provide a great framework for addressing these problems. However, the aim is to meet the SDGs in less than ten years – the deadline is 2030. It will also be extremely expensive. According to the UN’s Sustainable Development Solutions Network, there is an annual gap of $2-3 trillion between current public and private-sector spending on the SDGs – a gap that will widen as we near the target year, if we don’t make inroads in closing it.[1]

This massive gap can only be closed through a broad mix of funding sources. Governments, foundations, and impact investors in both private and public markets all have an important role to play, because none of these groups has the scale to achieve success on its own.

When it comes to public equities markets specifically, we see a huge opportunity in helping the world, and in making a return by doing so. Just as some SDG targets are best met by governments, foundations or smaller private companies, some are particularly well met by investors in listed equities.

Take healthcare, for example. To help fulfil the targets for SDG 3, Good Health and Well-Being, companies supplying solutions need considerable capital. They must often spend a great deal on research & development to create innovative solutions, that push the boundaries of what is considered scientifically possible. They also need the money to scale up production, to the point where they can make a sufficiently large contribution to solving large global health problems. This includes creating broad access to therapies. Listing on public markets is often an important step in providing the necessary capital and scale. In healthcare, this often happens at an earlier stage of a company’s lifecycle, relative to other industries. Innovative healthcare companies depend on heavy upfront R&D spending to deliver breakthroughs and manufacture the resulting therapies in sufficient quantity. Furthermore, capital intensity is increasing as we shift towards more effective and targeted biological treatments. If commercialised successfully, these ultimately lead to better patient outcomes than the current standards of care. Such large amounts of capital are often only accessible through a public listing.

In applying impact investing to public equities, we believe that the core tenets of impact investing, first established in private markets, need to be retained: the search for investments with the intention to generate additional positive impacts, alongside a financial return. However, this concept needs some adaptation so that investors can maximise their potential to deliver impact, when investing in listed equities.

Intentionality

Impact investors’ mission is to achieve a financial return by investing in companies with the potential to produce a specific positive environmental or social impact. However, unlike private equity investors, public equity investors do not enjoy significant control over the businesses they invest in. They do not provide financing for specific projects either, as bond investors might do. Investors like us cannot transmit our intention to generate a positive impact by directing and shaping the company’s mission. For this reason, we must look for companies already on that mission, that share our intentions.

Genuine intention to create a positive impact encompasses more than just an eye-catching mission statement, or deriving a certain proportion of sales from a positive impact solution. As long-term owners of the businesses which we invest our clients’ capital in, we seek to understand what drives the company’s culture, and how it plans to execute its mission as part of a long-term strategy. This requires us to understand not just what impact the company is making today, but how central this impact will be to the company’s mission in the future. For this reason, we have to interrogate management about their long-term vision for the firm, study its past, and ensure that we can garner quantitative as well as qualitative proof that management is walking the talk.

Additionality

We identify companies that are on a mission to address environmental and social problems with a unique solution, by using our proprietary Regnan SDG Taxonomy.

The SDG framework

In seeking solutions, we need a framework to identify problems that need solving. This is where we find the SDGs useful. Policymakers believe these are the goals society must focus on if it wants to achieve a widespread prosperity in a sustainable way. Taken at face value, the 17 SDGs are vague. Goal 12, for example, is Responsible Consumption & Production. For this reason, we prefer to concentrate on the 169 targets linked to the goals, since these are more informative about the specific issues that need to be resolved. For example, Target 12.5, one of ten targets linked to Goal 12, is a little clearer: “By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse.”

This is where, as specialists in listed equities, we must be realistic about what we can do, and what’s best left to others. We can think of two different investable solutions for Target 12.5 – “waste collection, recycling and reuse” and “logistics and food preparation”. However, some other targets don’t yield solutions that can be met by public listed companies. Target 12.8 is about giving people the relevant information to lead sustainable lives. That’s probably best achieved by NGOs and governments; we are yet to find a company that has uncovered a market-based solution to this specific target. Some of the targets for Goal 2, Zero Hunger, are probably best met by private investors for the time being. There are some great commercial ideas, but most are small business areas within global conglomerates, or are still at the venture capital stage.

We call this overall framework the Regnan SDG Taxonomy. It seeks to map products and services that exist to meet the SDG targets, understand their scope to scale, and learn about the companies that sell them. Along with our colleagues in the Regnan Engagement, Advisory and Research team, we have so far identified more than 150 investable solutions to 55 of the SDG targets, and we continuously seek to expand and grow this taxonomy, as new, innovative solutions are being delivered by newly listed and established companies all the time.

Measurement

Impact investing with integrity in equities is both essential and feasible

To conclude, the world needs impact investing in public equities, in order to deliver on the SDGs, but investors in this field must preserve the core tenets of impact investing. We are on a mission to do two things. We want to preserve these concepts, and the integrity that gave birth to impact investing. At the same time, we offer a solution that allows for additional positive impacts to be delivered at scale, through a platform accessible to any investor.

The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation. Regnan is a trading name of J O Hambro Capital Management Limited. Regnan Global Equity Impact Solutions Fund is subject to regulatory approval. The registered mark J O Hambro® is owned by Barnham Broom Holdings Limited and is used under licence. JOHCM® is a registered trademark of J O Hambro Capital Management Limited. J O Hambro Capital Management Limited. Registered in England No:2176004. Issued and approved in the UK by J O Hambro Capital Management Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: Level 3, 1 St James’s Market, London SW1Y 4AH, United Kingdom.

[1] https://www.unsdsn.org/sdgfinancing

This document has been prepared by Pendal Institutional Limited (Pendal) ABN 17 126 390 627, AFSL No 316455 and the information contained within is current as at November 25, 2020. This document is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this document may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this document is complete and correct, to the maximum extent permitted by law neither Pendal nor any company in the Pendal Group accepts any responsibility or liability for the accuracy or completeness of this information. Pendal is the responsible entity and issuer of units in the Regnan Credit Impact Trust ARSN: 638 304 220 (the Fund). An Information Memorandum is available for the Fund (IM) and can be obtained by calling 1800 813 886 or visiting www.pendalgroup.com. You should obtain and consider the IM before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. Past performance is not a reliable indicator of future performance.

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