Capital has an effect.
Impact Investment. Investments in innovative companies with a positive impact on the environment and society are increasingly becoming the focus of investors. But putting this idea into practice is not entirely straightforward. "Measuring and controlling the actual impact is just as big a challenge as building an optimized portfolio from the many exciting companies. We have developed a special approach for this," explains Huub van der Riet, long-standing manager of the NN (L) Global Equity Impact Opportunities Fund.
"1.7 billion people - almost a quarter of the world's population - do not have a bank account. This is a huge problem because without access to financial services there is no economic development. Safaricom, a Kenyan public company, aims to change that. And to make money from it," says Huub van der Riet, manager of the NN (L) Global Equity Impact Opportunities Fund Safaricom is one of Africa's largest telecommunications companies, with 35 million customers, or about 70 percent of Kenya's population. In 2007, the company developed a breakthrough product - M-Pesa. It thus set the stage for customers who previously had no access to the financial system to transfer money by mobile phone through their digital wallets. "The impact has been tremendous. More people can now get clean water or electricity," van der Riet makes clear, and continues: "The consultancy KPMG recently found that the total wealth effect of this is around ten times greater than the company's annual net profit."
This was made possible by shareholders who provided Safaricom with capital for its growth trajectory. And investors benefited too. Last year alone, the share price climbed by 40 percent.
Huub van der Riet cites the example of Safaricom because it is typical of successful impact investment. "By investing, investors support a company that makes a meaningful and measurable contribution to solving one of the great challenges of our time, and make money at the same time."
The idea of impact investing is by no means new. For some time now, wealthy families have been financing young start-ups that could improve our world with their business ideas. Interestingly, more and more fund companies are now also offering broad investor circles the opportunity to invest in this fascinating topic. "At the same time, it must be clear: With listed companies, the impact is made by the companies, not by the investor. However, we support them in this by providing capital. If the company can expand, this also increases its impact," explains van der Riet.
When the fund manager talks to interested investors about this approach, he always has to answer two questions first: How can the impact be measured? And: can I really make money this way? "Both are basically very easy to answer."
Social impact is what helps achieve the UN's development goals. In 2015, the United Nations had defined 17 goals in its 2030 Agenda to enable a decent life and preserve the natural foundations of life. These SDGs - Sustainable Development Goals - range from combating poverty to gender equality and climate protection. "And because this will require billions of dollars of annual investment by 2030, there must be innovative companies that are active in this area and also represent an attractive investment. I'm convinced that companies whose strategies are in line with the SDGs will be more successful in the long term than companies that don't care about their impact on society and the environment."
The concrete implementation of this idea, however, is not so simple. "Finding attractive companies from a purely financial perspective is easy. We have proven processes there. But when it comes to impact, it gets complicated," van der Riet explains, citing two challenges: "First, we need to find methods to define impact more precisely. And second, we need to be able to compare the impact to arrive at an investment decision. To compare a company that offers 'education' with a wind turbine manufacturer would be like comparing apples with oranges. Which is more important? Which company makes a bigger impact and is therefore more deserving of being in the portfolio?"
To answer these questions, Huub van der Riet and his team have developed a special selection process. "Our impact reporting framework has three phases: Identification, Assessment and Monitoring."
In the first step, the team checks whether products and services are actually aligned with one or more SDG targets. "In Safaricom's case, this is clear. Its activities pay into two goals at once - fighting poverty and increasing equality." Next, the impact comes under closer scrutiny. "What percentage of sales or research and development spending contributes to these goals? Who specifically is being helped?" At the heart of this is an analysis tool van der Riet calls MIT - "the acronym stands for Material, Intentional,Transformational."
The impact must therefore firstly be "material". Furthermore, behind the business idea there must be a firm intention on the part of the company to bring about positive change. The impact must not be incidental because a particular product is part of the business anyway. And the business must drive real transformation, i.e. make a significant difference. "Safaricom is triggering a positive snowball effect. People have a chance to escape the slums thanks to its involvement in the financial system. Buildings are created, jobs are created, growth is initiated. It's a real gamechanger, and there can be enormous potential in that."
With that, Safaricom is identified as an impact investment. The second step is now to try to assess the impact potential. "Of course, ESG risks also play a role in this. We check the environmental footprint, social components and corporate governance. But the most important part is that we identify so-called KPIs - key performance indicators - that help us measure impact quantitatively." At Safaricom, that's the number of people reached. Or just the wealth effect calculated by KPMG. "When there is such an analysis from an independent house, it is of course a godsend. In most cases, it's not so easy to find reliable indicators." After all, even supposedly clear-cut characteristics such as CO2 emissions savings are open to considerable debate. After all, the impact of a company producing advanced wind turbines varies widely depending on whether they are used in a country that already uses clean energy or one that still relies heavily on fossil fuels. "It becomes even more difficult when qualitative aspects come into play. More training is positive, of course. But how good was the education? And how did it contribute to the welfare enhancement of a society if the individual did other education during his career? We are only at the very beginning of the discussion," van der Riet explains.
But that is precisely what makes his job so exciting. The criteria continue to develop, everything is in flux. "It's a work in progress," says van der Riet, quoting sociologist William Bruce Cameron: "Not everything that can be counted counts. And not everything that counts can be counted." His answer to this challenge is maximum transparency. "We disclose exactly why we decided how based on what data. So that investors can understand. Crucial is the confidence that there is no 'impact washing' going on in our fund."
This means that in the final step, the extent to which the expected goals have been achieved is closely monitored. "This is part of the engagement process. We exchange information with the companies several times a year. Actively ask for more and better information. We collect it, review it, prepare it and encourage management to develop their impact reporting."
Overall, this is a challenging process. It's not for nothing that impact funds are now considered at the top of the sustainability pyramid. "Dark green funds, if you will," Huub van der Riet explains, concluding, "For us as fund managers, this is an extremely exciting journey. What could be more satisfying than generating above-average returns for our investors and thereby making the world a better place?" ®
// How to invest in impact - more impact, more returns.
NN Investment Partners has a broad range of impact funds. Three focus on specific impact solutions: 1) health and wellness, 2) climate and environment, 3) businesses that contribute to productivity improvements, more resilient infrastructure, higher education and a safer society. The flagship fund, NN (L) Global Equity Impact Opportunities, covers all areas and is therefore the most broadly diversified.
The actual investment process takes place in four steps. First, a universe of 20000 stocks is screened for growth potential, profitability and liquidity. In the process, 18500 fall through the cracks. "The 1500 remaining companies are interesting from a purely financial perspective. They have a kind of moat, a long-term competitive advantage, and thus generate high margins," explains Huub van der Riet. Now we will check whether and how these companies contribute to the achievement of one or more SDG targets. "For about 700 companies, we see real impact."
The third step is to assess the value chain. "This gives us 200 attractive impact stocks, which we analyse in detail once again. The three experienced portfolio managers then determine the 40 to 45 companies with the best combination of financial return and social impact. They go into the portfolio."
The manager makes sure that this is diversified by sector, region and theme. In addition, NN IP regularly publishes impact reports that make the impact achieved transparent.
So far, this combination of positive change and attractive returns has worked very well. Over the past five years, the NN (L)Global Equity Impact Opportunities has generated a return of over twelve percent per annum as of 31 March 2021.
NN Investment Partners
Bernd Riedel, Senior Sales Director,
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