Investing for Impact (UK)

The need to address environmental and social megatrends, including the climate crisis, resource scarcity and demographic changes, is driving interest in impact investing. With the potential to drive constructive change and address some of the world’s most pressing environmental and social challenges, while continuing to deliver competitive risk-adjusted returns, impact investing is of increasing interest to institutional investors. Aon’s experts explore why, and how, investors can develop an impact investing strategy.

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Introduction

We are on the cusp of a sustainability revolution more profound than many would suspect. The need to address environmental and social megatrends, including the climate crisis, resource scarcity and demographic changes, is driving a worldwide industrial restructuring and shifting the basis of competitive advantage among companies. This is leading to increased pressures on trustees and investors to drive constructive change and address some of the world’s most pressing environmental and social challenges, while continuing to deliver competitive risk-adjusted returns.

Impact investing aims to support these challenges. The Global Impact Investing Network (GIIN) definition for impact investing is helpful:

“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

Within a portfolio of exposures across different asset classes, most pension funds have substantial publicly traded equity holdings, which constitute the bulk of their investments. Within the context of Responsible Investment and the various approaches that can be taken, it is important for trustees to understand how their publicly traded equities could be invested in a more impactful way, and the potential financial advantage in doing so.

In this paper, we show how:

  • The role of impact investing is growing quickly.
  • Trustees looking to optimise financial returns and have an impact on solutions for the future should look to invest in companies that seek sustainable solutions.
  • Environmental and climate change concerns feature strongly in impact agendas, alongside more localised objectives.
  • The Sustainable Development Goals (SDGs), initiated by the United Nations in 20151, are supporting investors in how they direct and measure their impact, and address challenges with data.
  • A broad approach towards impact investing in public equities will be attractive, combining managers who favour solution providers with those who focus on engagement impact.
  • Trustees should look to actively engage with impact investing and seek out investment opportunities, which offer rewards from future solutions, while successfully navigating today’s Environmental, Social and Governance (ESG) risks.

Summary

  • Global megatrends are driving increased demand for Responsible Investment, and investment opportunities are presenting themselves as the need for solutions and innovation grows.
  • There is growing urgency for trustees and investors to find companies able to navigate a global transition given financial markets are expected to see increased volatility. Unless mitigating actions are brought forward, the impact on financial markets will be all the greater. Companies best positioned to withstand this volatility are those actively engaging with how their businesses are positioned for the transition to a greener global economy.
  • Trustees looking to optimise financial returns and have an impact on solutions for the future could do well by looking to invest in companies that seek sustainable solutions.
  • As public equity markets increasingly focus on sustainability, more companies will present themselves as solution providers. There is increasing momentum in terms of innovation and solutions offered, and this is set to grow. This may provide an early mover financial advantage.
  • In terms of which impact to have or which problem to solve, the United Nations Sustainable Development Goals have established themselves as a set of universally agreed desirable goals which together will also alleviate ESG risks and create a path towards greater levels of global sustainability. Investment strategies that are aligned with the SDGs can be flexible within public equity markets in so much as the investor can maintain a wide opportunity set and evolve with the market. Sectors within public equity markets will adapt, and innovations today will develop into the standards of tomorrow.
  • Trustees should look to actively engage with impact investing and seek out those investment opportunities which offer the rewards of risk mitigation, financial returns and impact. A multifaceted investment approach within public equity markets is one such optimal approach using a blend of managers while retaining diversification in a wide and liquid investment universe.

References and Links

1 United Nations, Sustainable Development Goals, 2015
2 GSIA Global Sustainable Investment Review, 2018
3 GIIN Annual Impact Investor Survey, 2019
4 Aon’s 2019 Global Survey on Responsible Investing
5 IPCC, 2018: Special Report: Global Warming of 1.5˚C, Summary for Policymakers
6 EU Taxonomy Technical Report
7 European Environment Agency, Average Co2 emissions from newly registered motor vehicles in 2018, Data
8 CISL, In Search of Impact, 2019


About Aon
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

For further information on our capabilities and to learn how we empower results for clients, please visit http://aon.mediaroom.com.

Disclaimer
This document and any enclosures or attachments are prepared on the understanding that it is solely for the benefit of the addressee(s). Unless we provide express prior written consent, no part of this document should be reproduced, distributed or communicated to anyone else and, in providing this document, we do not accept or assume any responsibility for any other purpose or to anyone other than the addressee(s) of this document.

Notwithstanding the level of skill and care used in conducting due diligence into any organisation that is the subject of a rating in this document, it is not always possible to detect the negligence, fraud, or other misconduct of the organisation being assessed or any weaknesses in that organisation’s systems and controls or operations.

This document and any due diligence conducted is based upon information available to us at the date of this document and takes no account of subsequent developments. In preparing this document we may have relied upon data supplied to us by third parties (including those that are the subject of due diligence) and therefore no warranty or guarantee of accuracy or completeness is provided. We cannot be held accountable for any error, omission or misrepresentation of any data provided to us by third parties (including those that are the subject of due diligence).

This document is not intended by us to form a basis of any decision by any third party to do or omit to do anything.

Any opinions or assumptions in this document have been derived by us through a blend of economic theory, historical analysis and/or other sources. Any opinion or assumption may contain elements of subjective judgement and are not intended to imply, nor should be interpreted as conveying, any form of guarantee or assurance by us of any future performance. Views are derived from our research process and it should be noted in particular that we can not research legal, regulatory, administrative or accounting procedures and accordingly make no warranty and accept no responsibility for consequences arising from relying on this document in this regard.

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