One investment style that TAM utilise in our sustainable world portfolios is impact investing. The premise is to ‘do good and make money’ by investing in companies providing a solution to issues faced by our environment or our society. However, due to the nature of financial markets these fantastic companies have not always delivered on the latter part of that statement, amid a challenged couple of years for this approach.
Impact investing as a concept began in private markets (venture capital and private equity) and was a way to invest philanthropically to aid issues faced by our environment and society, alongside delivering a financial return. However, private markets do not provide the transparency or liquidity that our clients value and thus TAM’s approach is to invest in funds compiled of publicly traded shares of companies. Rather than buying a whole company à la private equity. Through this approach, a positive impact can be delivered by buying shares of a nascent company and staying invested as they grow. Thus, providing capital for the positively impactful product or service to reach more people and make a greater difference. This differs to other sustainability approaches such as focusing on carbon emissions, which often looks to the operational footprint of a company, negative screening which removes companies from the investment universe based on how & where they derive their revenues and ‘ESG’ approaches who look solely to integrate and quantify environmental, societal and governance risks into their analysis.
Investing in impact usually leads to investing in growing companies. This style, a form of ‘growth investing’ has had a bumpy ride in recent years. After an impressive rally in sustainability and impact names in 2020/21, these smaller and mid-sized companies have been marred by changes to interest rates, inflation and an unwinding of excess enthusiasm in the space. During this time, the TAM team have been waiting for entry points into this specific style.
That’s because when investing in impact focused equities, you are investing in some of the most innovative, forward-thinking solution providers in the market. Within the Sustainable World portfolios, the majority of our impact focused investments are in bonds, due to our fondness of the ‘use of proceeds’ structure which helps to crystalise exactly how the company is using the cash raised from its bonds.
However, in November 2023 we believed the moment had arrived to invest in a traditional impact equity fund. Regnan Global Equity Impact Solutions, which was added to the portfolios at an exciting entry point after a tough period for the underlying companies, had consistently impressed us by their own proprietary classifications of investing for impact. Their thesis that ‘the impact is the investment case’ provides a framework that merits the exciting and potentially lucrative financial opportunities of being invested in environmental and social solutions providers as they become more mainstream. To date, this has been evidenced by its 19% return in client portfolios at time of writing.
At TAM, our thesis remains to stay diversified across sustainability approaches, identifying where we can add real value from an investment and sustainability perspective. Our mission is to make sustainability accessible, which means financial returns and risk management must be at the forefront of our approach. Therefore, we utilise impact investing as an incredible way for our investors to ‘do good’ with their investments, but we will only invest in these strategies if we see them as superior to other sustainability approaches in their ability to ‘make money’.