When it comes to impact investment, a huge chunk of global AUM has largely been missing from the picture: the $100trn in publicly listed equities.
Worldwide impact investing surpassed $1trn in AUM for the first time in 2022, according to the latest Global Impact Investing Network report. While this represents a ‘significant psychological milestone’ for the industry, it’s less than 1% of global AUM, and it falls far short of the $5trn needed annually to avoid the worst effects of climate change, let alone address the other Sustainable Development Goals.
In 2020, public equities represented 31% of impact investing AUM, despite there being about 10 times more capital in public markets compared with private.
Historically, critics questioned whether investing in public equities can count as impact investing. The argument centred around investor additionality, i.e. the ability to demonstrate that the impacts of the investment are over and above what would have happened anyway.
We contend that listed equities impact investing can – and needs to – be part of the solution, particularly when those investments are made in emerging and frontier markets, where populations are largest and in most need of essential products and services, capital financing gaps are greatest, and domestic investors are less advanced at engagement.
The argument around lack of additionality presupposes that the input of shareholders is purely financial. Engaged, constructive shareholders contribute far more than this by using active dialogue to ensure management focus on long-term impact and financial goals, as well as encouraging better disclosure of impact-related metrics.
Shining a light on businesses genuinely delivering solutions to some of society’s greatest challenges has the potential to improve access to capital for these businesses. Furthermore, patient investors provide a signal to these businesses that they can grow sustainably, in a volume and affordability-driven fashion rather than getting distracted by financial market pressure to maximise short-term profitability at the expense of long-term impact.
Established businesses in the public markets typically generate impact at a much greater scale than earlier-stage counterparts. Their customer bases number in the millions or tens of millions. Economies of scale and/or proprietary technology are often fundamental ingredients in the mass-market delivery of essential solutions to development challenges. These characteristics more frequently attach themselves to publicly listed incumbents.
A patient, engaged, measurement-focused approach to listed equities impact investing can both maximise scale of impact and achieve additionality.
