Can One Really Have ‘Impact’ in the Public Markets

By: Martin Grosskopf, MBA, MES • March 2, 2017 • Product Insights

Investors should ask questions in determining whether their investment portfolio is making an 'impact.'

Over the last 10 years, there has been a dramatic change in how institutional asset owners, such as pension plans and foundations, view sustainability issues such as climate change. Previously considered interesting but vague, 2015 stands out as a year that demonstrated the materiality of sustainability.

Governments around the world have agreed to take meaningful measures to reduce greenhouse gases entailing an energy and land use transition that will take decades to play out. Sectors such as automotive and coal have witnessed severe declines as they have proven to be on the wrong side of tightening environmental regulations.

These issues have heightened investor awareness of the risks associated with the transitioning to a more sustainable economy.

Equally important has been the rise in investor interest to have influence or ‘impact’ this change – in other words to seek out opportunities and accelerate change as much as minimize the risk.

Although historically investors used the term ‘impact’ synonymously with ‘community investing’ with a focus on private and local investments, it is now being more broadly applied to include certain categories of publically focused funds. Whether or not this is a useful evolution of the concept is open to debate.

We certainly believe that certain funds are designed to influence and impact the flow of capital in favour of sustainability solutions and that while they differ in approach and focus they have some characteristics in common. Our purpose here is to identify these.

One question we hear often is “how do I know if your fund really has impact?” We believe that truly ‘impactful’ portfolios have several common characteristics. The following questions are ones that we believe investors should ask in determining whether their investment portfolio is making an ‘impact.’

Is it off-benchmark?

After years of discussing climate change, the difficulty now for most institutional investors is not in defining the risk, but instead determining what to do about it within generally accepted investment parameters. These parameters view conventional benchmarks as arbitrators of what is reasonable from a risk/return perspective. Deviations from benchmark (meaning active investments) need to pay off relatively quickly to justify the additional risk taken. This constraint ensures that the bulk of public market allocation is either invested passively (which does not distinguish between companies business models) or through benchmark-optimized active strategies. In either case, the resulting financial products are quite obviously not designed to ‘transition’ away or towards anything. They are designed to provide some semblance of predictable financial behaviour and marketability.

We believe impact investing should actively seek to invest in companies that have the potential to create positive economic, environmental and social impact. Thus, funds that are ‘impact’-focused within the public markets rarely look much like conventional benchmarks and therefore have very high active share. As a result, they tend to show higher volatility, an attribute which is also reflective of a portfolio construction process that maximizes exposure towards sustainability themes.

“Funds that are ‘impact’-focused within the public markets rarely look much like conventional benchmarks and therefore have very high active share.”


Does it have a rigorous thematic approach?

For economies to become more carbon efficient and sustainable (meaning reduced energy intensity, emissions, water use, etc.), companies need to invest in new technologies and processes that can enable this transition. These innovations require long-term capital to develop and penetrate the market – in effect, ‘risk’ capital or what can be called ‘impact’ capital.

In fact, a ‘transition’ to a low-carbon economy entails that there will be investors who are willing to allocate towards those firms with the most attractive solutions for pressing environmental issues.

“We have found that there are few truly thematic strategies in the global investment management industry.”

Thematic investing requires that investors have a well thought-out process for defining a universe of companies engaged in providing solutions and selecting the most appropriate investments for a portfolio. The portfolio would be optimized for exposure to the themes and financial characteristics with both having importance. These funds assume that a ‘transition’ is occurring and will be positioned to benefit from it – they are not simply ‘hedging’ their fossil-fuel exposure.

We have found that there are few truly thematic strategies in the global investment management industry. Approaches that use engagement or ESG integration are far more common, but are limited in their ‘impact’ in that they do not solve the tension between short-term investor or management objectives and longer-term impact. One can be an ‘engaged’ or ‘responsible’ investor and still justify new investments in fossil fuel infrastructure as prudent within an overall portfolio. Not all investors will view it as their role to consider the longer-term impact of these commitments on environmental policy objectives.


Is the strategy taking fossil-fuel exposure seriously?

Although obvious, it is difficult to have impact by being invested in the very source of the problem that one is trying to transition away from. On the other hand, investing in (and thereby improving the cost of capital for) solutions providers entails a reduction in the weight elsewhere – logically from the most problematic sectors.

There are arguments made that selling any fossil-fuel company simply passes the shares on to less ‘responsible’ actors. However, some sectors are justifiably allocated away from due to their poor fundamentals, with coal being the latest example. Even the coal companies themselves have begun to disclose the divestment movement as a material risk to their cost of capital, indicating that new investors are not necessarily willing to backstop environmentally disadvantaged business models.

Clearly, many strategies will view the ‘transition’ period as being quite long and will look to maximize their cash flows from fossil fuels while they have the opportunity – these are likely not of interest to impact investors.

Does it publish a broad set of environmental data?

Measuring the environmental impact of a portfolio is in its infancy relative to measuring its financial characteristics. The data is reported differently by many companies, even within the same sector and its robustness can be questioned given the lack of third-party validation.

Despite these challenges, it is possible to collect data that gives a directional indication of the portfolio’s environmental impact. Reporting on single-factor issues such as carbon emissions is likely an early step – but more important is an overall sense of the portfolio’s environmental footprint, which will include other important factors such as water use, land management, toxic emissions, etc.

This broader data set is also increasingly useful for ongoing engagement with companies as even the most attractive solution provider will still have improvements it can make to its own manufacturing footprint.

“It is difficult to have impact by being invested in the very source of the problem that one is trying to transition away from.”


Does the investment team have specialized expertise?

Establishing the credibility of the investment team is of no less importance for sustainability-focused funds than for other investment products. In fact, we would argue that a strong background in both financial and environmental analysis is important for developing a robust process that can critically assess the various sources of data received – ESG research firms, sell-side reports, company disclosures.

Individuals with both strong financial backgrounds and strong environmental skills are very difficult to find. This is a skill set that is now being promoted within many MBA programs but has only become popular in the last few years. For funds with a longer tenure, expect to find environmental specialists who developed the appropriate financial skills later in their education or career. Most individuals with an early financial specialization do not have the technical knowledge of environmental issues to dig deeply into this side of the investment decision.

Is the 'sustainability' of financing a focus?

While many institutional investors recognize some opportunity within emerging sectors, such as renewable energy or battery storage, they often pursue these investments through private financing. Ultimately, however, most renewable projects are destined to be priced and owned in the public markets to satisfy the defined exits periods for private capital. Public markets are also, by definition, more participatory and reflective of a broader range of investors. Upstream and downstream markets depend on each other over time – both are essential if any low-carbon ‘transition’ is to occur.

Large institutional investors usually have access to private equity opportunities that have inherently lower volatility as they are not subject to the public market price fluctuations, which are more pronounced in the emerging sustainable sectors. As a result, the players in the public equity sustainable sectors are more likely than not dominated by hedge funds and day traders with shorter-term incentives.

The success of many of the ‘transition’ technologies will depend on the active involvement of patient, long-term capital within the public markets. An impact strategy should show awareness of its role within the financing ecosystem.

“The success of many of the ‘transition’ technologies will depend on the active involvement of patient, long-term capital within the public markets.”


Does the investment manager have a history of moving the bar forward?

The sustainable investment industry is still evolving rapidly as the products and processes adapt to changing trends and new priorities. Firms that are focused on having impact have usually been involved in industry associations and research initiatives over many years as they strive to add to the base of knowledge in the industry and strive for continuous improvement. 

Has the fund a demonstrated tenure?

True commitment to sustainable investing requires firms to support their products during periods of poor performance or lack of interest. Too many times, over the years, firms have launched products with an ‘impact’ or ‘sustainability’ focus only to close them quickly if they do not immediately reach or unable to maintain hurdle rates. Naturally, the logic is to make short-term financial targets but the nature of these products is longer term. The need for firms to reallocate capital to the highest returns should be balanced with the need to nurture a sustainability product in a too often fickle market. 

CONCLUSION – Impact portfolios are needed

AGF Sustainable Growth Equity Fund has had a long history of directing capital at firms that are offering solutions to pressing sustainability issues. We believe that it is certainly possible to have an ‘impact’ through public equities – in fact, it is necessary to help facilitate the transition to a lower carbon economy.


For more information on AGF Global Sustainable Growth Equity Fund, including up-to-date performance information, please visit contact your Financial Advisor.

1. Does not provide investment advice or recommendations

Image Source: MaRS ‘State of the Nation: Impact Investing in Canada’, 2014.

On August 7, 2007, the Fund changed its investment objective to permit greater foreign-property investments. AGF Investments Inc. replaced Acuity Investment Management Inc. as portfolio manager, effective April 17, 2015. AGF Clean Environment Equity Fund was renamed AGF Global Sustainable Growth Equity Fund on May 20, 2015.

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