The case for impact in public equities

Dirk Schoenmaker, Professor of Banking and Finance at the Rotterdam School of Management, emphasises that finance fundamentally revolves around the allocation of resources. "Impact investing means allocating funding towards companies that aim to create a positive impact," he explains. "This includes not only startups but also established firms willing to reform their business models. Including large companies in your investment portfolio is critical for scalability; they can undertake projects that drive substantial societal benefits."

William de Vries, Director Impact Equities and Bonds at Triodos Investment Management, reinforces this by stating that without investing in listed companies, achieving meaningful impact becomes nearly impossible. "You need a significant shift in allocation to finance the transition effectively," he asserts.

The role of engagement

Engagement is a pivotal strategy when investing for impact in public markets. It involves a detailed examination of a company's contributions to society before investing. "You need to thoroughly analyse whether a company is making a positive impact," says De Vries. This qualitative analysis is complemented by quantitative data that has become increasingly available in recent years, allowing investors to substantiate their claims of positive impact.

Schoenmaker emphasises that qualitative assessments are vital, providing evidence of a company's commitment to sustainability. This includes analysing capital expenditures and R&D investments to determine if a companyis genuinely moving towards a sustainable business model.

The discussion underscores the necessity of rigorous engagement, which involves setting measurable targets and timelines for companies. Schoenmaker notes the importance of having exit strategies if companies fail to meet these agreed-upon standards. This proactive approach ensures that investors are not merely passive observers but active participants in steering companies towards positive change.

Transition finance: a broader perspective

A term that is gaining traction in impact investing circles is transition finance. Yet, its interpretation varies widely. De Vries emphasises that Triodos IM adopts a stringent definition, focusing exclusively on companies already on a positive trajectory. "We only want to finance companies that meet our minimum standards for positive impact, which excludes the vast majority of businesses out there," he articulates.

Schoenmaker adds a layer of complexity by explaining that transition finance in his view should also encompass helping existing companies phase out unsustainable practices. "Investors must encourage companies to not only adopt sustainable practices but also to actively reduce their reliance on outdated, harmful business models," he states. He sees this dual focus on both leading-edge firms and those needing to transition as crucial in creating a holistic approach to impact investing.

Measuring impact: a blend of qualitative and quantitative insights

An essential question that arises in the realm of impact investing is how to measure the effectiveness of engagement. Schoenmaker states that while quantifying impact is important, it should not overshadow qualitative observations. "We can observe changes even if we can't fully quantify them," he asserts. He introduces the concept of "integrated value", which combines financial, social and environmental metrics to assess a company's overall impact. By employing methods that draw on collective insights, investment firms can better gauge whether their efforts lead to meaningful change. This idea resonates with De Vries, who emphasises the importance of transparency and accountability within the investment process. He notes that while measuring progress is essential, it is equally important to acknowledge that attributing success to specific actions can be complex. "Ultimately, it’s about whether change is happening," both agree.

The future of impact investing in public markets

Both Schoenmaker and De Vries express optimism about the future of impact investing in public markets. They argue that a shift towards a stakeholder model - where companies consider the interests of all stakeholders, not just shareholders - could pave the way for more significant advancements in sustainable practices.

"By moving away from shareholder supremacy and embracing a stakeholder perspective, we can create coalitions that drive genuine change," Schoenmaker explains. This transformation is especially vital in Europe, where stakeholder principles are becoming more accepted compared to the U.S. He believes that the stakeholder model will ultimately prove to be the most effective framework for sustainable investing.

In conclusion, professional investors have a unique opportunity to drive meaningful change in public markets through impact investing. By combining rigorous engagement strategies, a commitment to understanding company practices, and a focus on financing important transitions, investors can ensure their capital is allocated to firms that not only promise but also deliver positive societal and environmental outcomes.

Listen to the podcast with Dirk Schoenmaker and William de Vries.