In our conversations with clients, we are sometimes asked how investors can achieve impact in public equity markets.
This is partly due to impact investing’s origins in private markets, which can lead investors to expect similar mechanisms, approaches and outcomes in public markets.
Investors rightly question how buying a company’s shares in the public market can generate impact. However, focusing solely on the point of purchase can obscure the wider contribution that an active, long-term shareholder can seek to make.
Impact investing in public market equities typically begins with investing in companies whose products and services contribute to positive environmental and social outcomes; for example, these businesses may be helping to accelerate the energy transition, improve resource efficiency or expand access to healthcare.
However, selecting companies that generate positive outcomes is only one part of the public-equity impact equation. Ownership of a company’s shares also provides investors with stewardship rights, which is a vital element of public market impact investing as it provides opportunities to engage with management teams, seek to influence corporate behaviour and encourage businesses to scale their impact over time.
It is this engagement process that is widely understood as a primary lever through which investors can seek to contribute to impact in public equity markets. Public investors can still provide capital through initial and subsequent share offerings. Collectively, investor demand may also send signals to companies and the wider market. In practice, however, active ownership through engagement and wider stewardship is often the primary mechanism through which an individual public-equity investor seeks to demonstrate their contribution.
This is one of the key distinctions between impact investing in public and private markets. In private markets, impact is often associated with a particular project, such as financing the construction of a new solar farm or affordable housing development.
In public equity markets, impact is delivered and measured differently. Rather than funding a project, public equity impact investors seek to influence how businesses scale positive environmental and social outcomes and address potential impediments to that aim. Put another way, in public markets, investors ultimately seek to influence a company’s own investment, strategy and spending decisions to strengthen impact outcomes.
Investor stewardship is therefore typically one of the clearest means through which an investor can seek to make an additional contribution.
The role of engagement
Through structured and ongoing dialogue, investors can encourage companies to strengthen their approach to impact and increase their ambitions. We find that being patient, long-term investors can help build strong, constructive relationships with company boards and management teams.
The focus of each engagement is shaped by our priorities, the company’s circumstances and where we believe we can make the greatest contribution. This may include encouraging companies to:
- Improve how they measure and report impact, moving beyond activity-based metrics to demonstrate the environmental or social outcomes their products and services help deliver.
- Strengthen governance and accountability, including through financial incentives that encourage management to deliver the company’s impact objectives.
- Establish clearer impact objectives and link business strategy and investment plans to intended outcomes.
Together, these engagements can help companies evidence their impact, embed accountability for its delivery and influence the strategic and investment decisions that determine its future scale. If successful, these engagements can help a company strengthen or accelerate its impact beyond what might otherwise have occurred. In impact terminology, this is the “additionality” that public-equity impact investors seek to generate.
Additionality asks what changed, or became more likely, because of the investor’s actions. Investing in a company that already generates positive outcomes is not, by itself, sufficient to demonstrate investor additionality.
Demonstrating additionality requires investors to explain the contribution they intended to make, the actions they took, how the company responded and whether its strategy, practices or outcomes changed as a result.
This contribution will not always be attributable to one investor. Progress may result from sustained engagement by several shareholders, changing regulation, customer demand and the company’s own leadership. Credible impact practice should recognise these different influences rather than claiming sole credit. The appropriate claim may therefore be one of contribution rather than direct or exclusive attribution.
Effective engagement is therefore more than dialogue. It requires clear objectives linked to the overall impact of the fund, evidence of progress and, where appropriate, escalation through voting, collaborative engagement or other stewardship tools. A robust engagement framework can help investors document their objectives, actions and evidence of progress, supporting more proportionate assessments of their contribution where outcomes cannot be clearly attributed to a specific request.
The role of public equity impact investors
Impact investing in public equities is about more than constructing a portfolio of companies whose products and services address sustainability challenges. It also requires investors to define the contribution they intend to make as owners.
That contribution may include encouraging companies to improve impact measurement, strengthen governance, allocate capital towards activities with better outcomes or address risks that could undermine their positive impact. Effective engagement should be supported by clear objectives, milestones and evidence of company response, with voting, collaboration or escalation used where appropriate.
Public-equity investors cannot claim sole responsibility for the impacts generated by portfolio companies, and their influence will vary according to the circumstances. However, through disciplined company selection, structured stewardship and a clearly defined impact intention, they can seek to make better outcomes more likely, more ambitious or achievable sooner than would otherwise have been the case.
Aaron Cox, Impact Strategist
Disclaimer
This document has been prepared by EdenTree Investment Management Limited and has been produced for information purposes only and as such the views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest thereto. These are the views of the author at the time of publication and may differ from the views of other individuals/teams at EdenTree Investment Management.
This marketing communication is issued by EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Benefact House, 2000, Pioneer Avenue, Gloucester Business Park, Brockworth, Gloucester, GL3 4AW, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.
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