In this month’s commentary, Seb Beloe (Head of Research) has partnered with Thora Frost from Carbon Trust to discuss how to improve investor confidence in impact investing. They look at “impact washing”, emerging good practices and impact during COVID-19.

In the press, George Latham (Managing Partner) spoke with CISI in their special report, “Progressing with Purpose – a report on why purpose is set to take centre stage“. George explains how purpose is an essential part of the impact investor’s DNA.

We are also pleased to announce Ray Dhirani has been appointed to our Independent Investment Advisory Committee. Ray leads the sustainable finance team at WWF-UK, where he has spent the last eight years. We are thrilled to have someone of Ray’s calibre join our committee.

Lastly, we recently published our Q2 2020 Report in which Ted Franks (Fund Manager) gave an update on the fund and shared our views on sustainability and the IT revolution.

Top Holdings (alphabetically)

Agilent Technologies United States Health Care

Ansys United States Information Technology

Danaher United States Health Care

Icon Ireland Health Care

Linde United Kingdom Materials

MSA Safety United States Industrials

Roper Technologies United States Industrials

Steris United States Health Care

Thermo Fisher Scientific United States Health Care

Varian Medical Systems United States Health Care

Worries over the further spread of COVID-19 continued in July. The USA hit a record high in daily cases during the month. There was also a resurgence of reported cases of COVID-19 in the EU. Against this backdrop, many of our companies reported their second quarter results during July.  Most did well, delivering ahead of market expectations.

The Fund generated a return of +2.27%, outperforming its benchmark MSCI World index which achieved +0.60% for the month of July. The outperformance was driven by our two biggest themes, Resource Efficiency and Health. Our Education theme performed poorly this month.

Resource Efficiency was the single best performing theme in the month. Kion was the biggest positive contributor within the theme. It is a market leader in the electric forklift market and in warehouse automation. Its logistics solutions help improve efficiency and optimise material and information flows within factories, warehouses and distribution centres. Its latest quarterly order intake in its warehouse automation division was a record high. This corroborates our thesis that warehouse automation has a bright future. Efficiency and sustainability were already long term drivers, before the pandemic highlighted the importance of resilience and flexibility.

Renishaw was another strong contributor in the theme. It is a UK company selling high technology precision measuring and calibration equipment. Its products are used in making manufacturing processes more resource efficient. The company marginally upgraded its sales guidance in a trading update. Even this small move alleviated investors’ concern: some of its key end markets such as automotive and aerospace seemed to have been hit hard during the pandemic.

Our Health theme was another positive contributor. Varian was the main positive contributor in the theme. It is the world’s leading supplier of radiotherapy equipment. It also provides software tools for planning and treatment of cancer. Shortly after the month end, it agreed to be acquired by healthcare conglomerate Siemens Healthineers, in an all-cash transaction. The offer price represents a premium of 24% to the close price prior to the announcement.

Danaher was also a strong performer in the Health theme. Its products address both environmental and social challenges. It sells laboratory products to clinical and medical laboratories including microscopes, analytical software and imaging devices. It also sells equipment to test and treat water. After the acquisition of GE Healthcare Life Science, Danaher has significantly strengthened its life science product portfolio. Its products make meaningful contribution in the COVID-19 therapeutic and vaccine development.

Our Education theme performed poorly this month mainly due to the weak performance of Strategic Education. The company offers graduate and postgraduate degree courses for adults. It owns physical campuses, but its main growth strategy is to delivers courses through online platforms. The stock underperformed after the company announced an acquisition, expanding into the Australian and New Zealand markets. High unemployment in the U.S. may also suggest weaker enrolment in the near term. We will continue to evaluate our position in view of the latest developments. However, we still believe that COVID-19 will accelerate online education and career-oriented education over the long term.

In July, the U.S. dollar weakened substantially versus major currencies and gold price hit record high. It would suggest the investors’ perception of risk remain elevated. On the other hand, the global market indices continued to climb up, supported by an abundance of liquidity. Quarterly results so far have been generally better than expectations. We believe our diverse sustainability drivers will help withstand short-term volatilities and drive long-term performance.

Improving investor confidence in impact investment

This article was co-authored by Thora Frost (Senior Client Manager, Carbon Trust) and Seb Beloe (Partner-Head of Research, WHEB)

The impact investment market has grown rapidly in recent years as investors increasingly allocate capital on the basis of both potential financial returns and the intention to generate positive societal and environmental impacts.

How are these intentions measured and how credible are impact claims?

The International Finance Corporation (IFC), a member of the World Bank Group, estimated that in 2019 assets managed by private funds with impact intentions totalled US$405 billion, of which US$205 billion were identified as having the impact of their underlying assets measured. Adding assets managed by developmental financial intuitions, the total assets under management with impact intentions reached US$2 trillion in 2019, of which US$505 billion include measurement and reporting of impact.

Risk of ‘impact washing’

A lack of clear definitions, common standards and guidelines has led to some confusion amongst investors. As the market for impact investment matures, investors are scrutinising reporting methods more closely. The risk of ‘impact washing’, where traditional investments are merely labelled as impact investments in an attempt to benefit from any positive attributes linked to this relatively new asset class, is emerging as a concern. Not only does this have the potential to weaken and distort the market, it will also hinder growth by undermining investor confidence.

The Two Degree Investing Initiative found, for example, that among retail investors who said they were not interested in investing in ‘impact’ funds, 48% said it was because of scepticism about the claims being made. Transparency and consistency in impact reporting methodologies is therefore key to instilling investor confidence. Investors need to be able to have confidence in claims to identify opportunities effectively and accurately compare investment products.

Emerging good practice

As the demand for greater transparency increases, the guidance and structure around impact analysis and reporting has continued to advance. Recently developed frameworks, guidelines and standards strengthen efforts to definite good practice around impact reporting.

In 2019, the IFC published the Operating Principles for Impact Investment Management, a high-level framework for impact investment with over 100 signatories. Consisting of nine principles, it was designed to build on a range of existing standards, tools and frameworks, including the Impact Management Project (IMP) which focuses on measurement and not process, and IRIS+1 a publicly available system of indicators.

In 2018, the UN Principles for Responsible Investment (UN PRI) published an Impact Investing Market Map, which set out a method to identify impact investment companies based on thematic investments (i.e. renewable energy) and lists common KPIs to help monitor performance. The method compliments the IFC framework which for example requires fund managers to assess the expected impact of each investment, based on a systematic approach, without providing a specific method to do so.

The green bond market has also benefited from a set of common standards, such as the ICMA Harmonized Framework for Impact reporting, which were developed to report the impact of green bonds in response to investors seeking greater transparency.

Impact in a time of Covid-19

With the impact of Covid-19 rippling across global economies and an emerging focus on green recovery, now more than ever investors are turning their attention to investment options that deliver a positive impact on societies – reviving jobs, tackling inequalities and helping to accelerate the move to net zero carbon economies. This creates an opportunity for impact funds to respond to this demand, and committing to transparency and ensuring credibility will be key to their success.

Importance of an independent review

One of the reasons behind the success of the green bond market is undoubtedly2 the development of clear standards and the emergence of independent certified verifiers providing second party opinions. Similar developments should support the market for impact investment as investment managers increasingly seek independent verification.

An independent review of impact reporting methods and underlying models improves confidence in the data and the integrity of the impact reporting. It is therefore unsurprising that the 9th principle of the IFC framework states that: ‘The Manager shall publicly disclose, on an annual basis, the alignment of its impact management systems with the Principles and, at regular intervals, arrange for independent verification of this alignment’.

Encouragingly, this message is landing and we are seeing an increased appetite from asset managers and issuers of green finance products for assistance and assurance around impact reporting. A positive continuing trend that we believe will help to underpin a healthy and vibrant market.
The Carbon Trust recently worked with impact investor WHEB Asset Management to peer review its impact measurement methodology. We also examined the underlying calculations to ensure the reliability of the impact figures reported.

WHEB has one of the longest established impact investment strategies in listed equities. Appointing the Carbon Trust demonstrated WHEB’s continued commitment to improving the transparency of its impact reporting.

As impact becomes a more central part of the value proposition to investors we expect to see a growth in the demand for more rigour and standardisation of impact measurement and reporting. We were pleased to be able to work together to progress good practise in impact measurement and hope to see more investors ensuring their claims are verified independently to increase investor confidence.