1 juli 2016

Impact Investing in Public Equity: What Stock Markets (can) do

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Update concerning this blog: The Amsterdam Stock Exchange was just named the most sustainable! Being Dutch, a citizen of the worlds champion #impactinvesting I sometimes forget that our ''normal'' is actually exceptional once compared to other area's. And yes I have become quite chauvinistic :) Corporateknights/2016-sustainable-stock-exchange-report

Another update concerning this blog: Morningstar launched a Country Sustainability Benchmark mid October 2016 based on country indices and the underlying portfolio: Morningstar/MorningstarSustainabilityAtlasOctober2016
(pdf, 9 pag.) PORTUGAL wins based on a small (13 comnsituants) heavy weighed index (66%) by three companies. The ESG methodology includes Controversies.

A stock market is the aggregation of buyers and sellers of stocks (also called shares); these may include securities listed on a stock exchange as well as those only traded privately. Wikipedia

Impact Investing is investing with measured positive impact and risk related financial returns. It goes beyond the People-Planet- Profit principles focusing on specific sectors and peoples.
The visual shows traditional DEEP impact investments 'doing good' on the left, top & bottom and BROAD impact investing 'doing less harm' on the right in the evolved responsible, sustainable and ESG Risk universe. More on Broad & Deep Impact Investing in the visual on pag. 7.

 Impact Investing is investing to create, grow and develop markets in Basic Needs such as work & income through inclusive finance, (sweet) water infrastructure & management, food, agriculture and biodiversity, power from renewable energy, affordable safe housing, affordable accessible health care & hygiene, (private & vocational) education etc.

Also investing in Information & Communication Technology such as smart data and green & clean technology as they are important Impact Catalysts with ''disruptive change'' potential creating markets with new products & services for new consumers.

Investing in Underserved Communities is a characteristic in both developed and emerging markets. Originally the work of (multi) national Development Banks, the US has developed Community Development Notes and private parties are now exploring thematic impact investment instruments such as Impact Notes. The UK has developed Social Impact Bonds as part of it's public social investment program. The global micro- & inclusive finance sector mostly serves 'the Bottom of the Pyramid' population, but the offer of mesofinance for small entrepreneurs in developing and emerging countries is growing rapidly. Developed markets see likewise spin offs and are embracing crowdfunding as a means to support private initiatives and employment growth.

Although impact investing is often still associated with private equity by development banks and philanthropy it is actually an all asset classes investment strategy practiced by institutional and retail investors focusing on impact which can be divided in different objectives or pursued by investments in different (sub)sectors.

Basically there are 5 types of impact investing of which Direct and Indirect impact investing are most interesting for stock exchanges because they are about listed equity offering transparency and liquidity but also volatility :)

TYPE 3: Direct Impact Investing is investing in impact sectors: financial inclusion for work and income, SME (Small Medium Sized Enterprises) or meso finance for job creation & economic growth, powered by renewable energy, sustainable infrastructure for economic development, green & clean tech, etc. Green bonds are tailor made listed instruments focused on Climate Change and ESG risk.

Green Bonds were a Development Bank instrument, but recently the market has accelerated because corporations find them a great tool to attract cheap(er) finance for their green (er) activities. They are often oversubscribed and risk thus coupons are really low. They offer investing in the aforementioned sectors, but also in Environmental Risk investments such as lowering carbon emission & water use in green real estate / property, and green tech energy efficiency etc. For an actual list of green bonds emissions Climatebonds.net/data/bonds Issuance reached 42billion US$ in 2015, mid 2016 it is already 35billion US$.

Developed markets, China and India are embracing this 'new' financing tool. The global market is guestimated at about 600billion US$. Luxembourg has listed most Green Bonds: 100 and the Oslo Exchange has a separate listing for labeled, verified Green Bonds.


Note that Social Impact Bonds are private equity impact investments with catalytic and philanthropic investors. They aim at innovation, creation and or prevention and are willing to accept lower risk related returns. 

Direct Impact Investment Instruments include the Charity Bonds listed at the London Stock Exchange ORB, retail platform. The last one for the Charity Aid Foundation raised 20milion Uk£, twice the intended amount, weeks before the offer closed. Social Property does very well at the LSE ORB as well. Retail Charity Bond LPC has been set up to launch charity bonds cheaply & easily for social sector organizations. London also houses the Socialstockexchange, not a trading platform, but helping listed corporations to raise money by publishing their impact and impact ambitions.

TYPE 4: Indirect Impact Investing refers to the green / social activities of corporations and their ambition to upscale those activities in the future. One can check out the aforementioned Social Stock Exchange for impact (ambition) reports, read sectoral and individual CSR reports or companies (changing) position on Sustainability & ESG (Environment, Social & Governance) benchmarks offering insights and results in sustainable business management and Transparency.

When exploring indirect impact investments I look for ESG opportunities as impact catalyst prospects, both by innovation and upscaling. ESG opportunities however are a small group in the ESG Risk oriented investment universe. Some ESG research bureaus publish outlooks naming ESG Risk and a few ESG Opportunity companies as well.

The visual on the next page shows an overview of existing index families that are relevant to public equity impact investing. Stock market indices are a measurement of the value of a section of the stock market. They are computed from the prices of selected stocks (typically a weighted average). They are tools used by investors and financial managers to describe the market, and to compare the return on specific investments. Wikipedia 
Often indices value companies over others based on their trade turnover, capitalization, regional activities, sectoral weight etc. Especially Top holdings give insights in financial specialist opinion of companies ie investments. Some indices are equally weighed meaning for instance that if the index holds 100 companies they are all 1% of the index. 

Derived index funds or ETPs in the visual on the next page stands for Exchange Traded Products (or Funds) which offer direct investment opportunities traded on stock exchanges. An ETF can hold assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. By 2013, ETFs were the most popular type of exchange-traded product. (Wikipedia). They offer liquidity but also a large spread without the buy/sell costs or adapting the portfolio to changing values. 


Thematic indices show specific impact ambitions and or results. Investment products have been developed with thematic positive screening such as the iShares MSCI Global Low Carbon index etf and the BNP Easyetf Low Carbon 100 etf for Europe.

Equality indices screen on policies for staffing, consumer targetting and branding. They look at opportunities for women, minorities, handicapped employees and / or with alternative sexual orientation.

Investing in Women is stated as the biggest impact theme according to the Global Impact Investment Network. It includes large caps with female CEO's, board members, meso finance for women entrepreneurs and micro finance which in practice aims at women as target group and the better debtors. Bloomberg Financial Services recently launched a largecap index: Bloomberg/GenderEqualityIndex (pdf) and Dutch asset manager Robeco launched a Global Gender Equality Fund in 2015. Robeco also launched a Child Impact Equity Fund with large caps whose core activities have no relation to children's rights (Shell, Pepsi Bombardier etc). RobecoSAM/GlobalChildImpact (pdf)

Gay Friendly or LGBTQ (Lesbian, Gay, Bisexual, Transgender, Queer) indices also select companies on equality & diversity policies. Credit Suisse launched a LGBT Fund in 2013 and recently published a report on the strategy: LGBT-companies-are-beating-the-stock-market.

Megatrends, Blue Gold, Climate Change, Eco Real estate indices offer impact investment opportunities in population growth, aging, resource scarcity, water management, climate change, sustainable or green property etc. ECPI offers thematic index series: ECPIgroup/index-rules-factsheets

Trend investing, a relatively new investment product offered in the US, Germany and the Netherlands works with 100% transparent indices. Most of the trends offers impact & scaling focusing on Health Food, Sport & Fit, Biotech, Medical Equipment, Robotics, Renewable and Solar energy. The Internet if Things, Cyber Security and 3D Printing hold promise as impact catalysts. Also offered are Women in Top and Gay Friendly well known impact investment themes and investing in Aging is expected to be introduced.

In the Netherlands we have 3 DEEP Impact Indices of global leading large cap companies and of corporations efforts to develop available and affordable Access to Medicine, to Seeds and to Nutrition. IRMA is the Responsible Mining Index.

Sectoral Indices are relevant for impact investing when the sectors focus on basic needs fulfillment. Unfortunately this label is nowhere to be found so it takes some research to find companies that deliver basic needs services or products and are sustainably managed so their operations, services and products do not undermine their core activity impact.

Regional indices are relevant as Impact Investing is about investing for the Underserved and especially the Base of the Pyramid (CK Pralahad), the Poor. Thus peoples in Emerging & Developing countries but also there a focus on basic needs suppliers and sustainable business operations is needed. Unfortunately regional indices only focus on geographical regions such as continents, Emerging countries, BRIC (Brazil, Russia, India & China, a fading focus), intertwined economic zones such as the Eurozone or EMEA, Scandinavia/Nordic or single countries.
Small investors are often national investors though the creation of the Eurozone but listings in US$, Euros, Ukpounds etc have opened up regions for many.

Mentioned in the impact investing visual but not the indices visual is ethical or responsible investing the origin of sustainable & impact investing. But Responsible or Ethical investing exclude companies based on harmful products or services such as AGTAF: Alcohol, Gambling, Tobacco, Adult Entertainment (pornography) and Firearms. Exclusion was developed when investment funds ruled and were linked to fund managers or ethics analysts such as Pax (US), Ethisphere (US) and Ethibel (Belgium).

Sharia indices also exclude specific sector and / or companies and add certain financial services as Islamic beliefs for instance do not allow charging interest.
The tiny Malta Stock Exchange has a Sharia Index, remarkable since it is a 95% Roman Catholic country. It can be explained by it's proximity, historic and trade relations with Libia, Libian investors fleeing Libia's disintegration and Libian refugees. BorzaMalta/ShariaIndex. The Malta Stock Exchange focus on technology and SME's holds an opportunity to expand it's Impact Investment offering to it's international customer base. To achieve that the technology should be impact oriented. SME's are employment catalysts in itself and the Borza's aim to support sustainability holds promise as well.

Sustainable indices list companies based on their operations, their Environ-ment, Social and Governance Performance (ambitions) which include Corporate Social Responsibility frame-works and international codes of conduct such as UN Global Compact, Global Reporting Initiative (transparency), the UN Principles for Responsible Investment (for financials), ILO (labor) charters etc.

In general listed companies focus on Broad impact investing, doing less harm through their operations. Their business case is often spending less on energy, water, resources, better safety records, lower sick leave or personnel turnover. Decoupling is the term for growing without increasing negative impact. Not so much on doing good which is considered sustainability 2.0 with less direct savings and a long term horizon for cost effectiveness.

Deep Impact Investing, doing good can be achieved by developing better affor-dable basic need products & services. Affordable refers to those that need it most, but poor people make poor customers. The growing middle classes in emerging countries are however changing corporations long term planning thanks to C.K. Pralahad.

Sector leaders in relevant sectors such as health or food & hygiene like as Philips Health or Unilever have ambitions that clearly distinguish them from the laggards and still inward focused companies. At Philips, we strive to make the world healthier and more sustainable through innovation. Our goal is to improve the lives of 3 billion people a year by 2025... Unilever strives to realise our vision of accelerating growth in the business, while reducing our environmental footprint and increasing our positive social impact.

Philips and Unilever are/were super sector leaders in the Dow Jones Sustainability Index based on data collected by RobecoSAM a joint venture of the Swiss sustainability data bureau SAM and Dutch asset manager Robeco (Orix). It was launched in 1999 and nowadays it is an index family with over 20 main indices which can be customized and even has indices including AGTAF companies. As the indices are based on companies operations looking at CSR, ESG and Sustainability performance but not on core activities, they contain many non impact sector companies or in food & beverages companies with products which are not necessarily good for people such as soft drink manufacturers Coca Cola & Pepsi. Fossil fuel companies are also part of the universe regardless of their (lack of) renewable energy activities as is the Dutch brewery Heineken, famous for it's water saving program and progress. Sustainability-indices/DJSindex-family.
The FTSE, London Stock exchange based FTSE4Good was launched in 2001 is also an ESG based index. It is a series managed by index builder Russel. It also has 4Good indices for Spain (IBER4Good) Malaysia and ASEAN countries: Malaysia, Indonesia. Thailand & the Philippines. The new ASEAN 5 index will include Singapore. FTSE/FTSE4Good

Euronext (Amsterdam, Brussels, Paris, Lisbon and London options) works with Vigeo(-EIRIS) the French index builder. Vigeo/indiceEuronext (8 including Global, US, UK and an the Emerging Markets Index). It also offers the Mirova Social-Progress-Index developed in 2009 by the SRI team of the French asset manager Nataxis and ESI Ethibel Sustainable Investing which is a joint venture of Belgiums Ethibel & Vigeo-EIRIS. Note that the major Dutch large cap index AEX holds companies which are practically all part of sustainability indices, as is the majority of the Bel20 (Brussels) and the CAC40 for Paris.
To check companies listing in indices: the German platform Sustainable-investment.org offers an overview of companies per country and listings in sustainability indices (go to stocks).

Euronext also offers a thematic index: Low-carbon-100-Europe-index, and sub-sector indices. Biotech companies listed on the Paris, Amsterdam & Brussels Stock Exchanges in Euronext/BIOTECH and the Euronext TechIndex holds domestic companies admitted to Mid&Smallcap & Alternext listing on Euronext markets in Biotech and Medtech, Cleantech and Technology-Media-Telecom companies (as defined by EnterNext). Euronext/indices The latter are actually impact sector indices thoutg the Technology-Media-Telecom sector deserves some further research in its impact.

The Deutsche Börse Group known for its STOXX and DAX indices reports 35 sustainability indices based on data provided by Sustainalytics, a top sustainability research and analysis specialist, which rates companies on environ-mental, social and governance (ESG) performance, and the importance of these factors. 27 indices are linked to the STOXX universe, offer global and regional sub indices and even distinguish between Environment, Social or Governance Leaders: Stoxx/sustainability&IndexFamily. Nite that Social refers to employees, the local community and stakeholders. The Öko DAX index is for renewable energy (9 companies), it also offers the Photovoltaic Global 30, DAX Global Alternative energy and joint venture indices: DAXGlobal Sarasin Sustainability Germany and Credit Suisse Global Alternative Energy SSEInitiative.org/fact-sheet The latter are actually impact (sub) sector indices.

Italian and Italy investors are served bij ECPIGroup an Italian index builder which has evolved from ethical (exclusion) indices to sustainability (inclusion) indices and even Megatrends indices (but offers traditional index series as well). ECPIgroup. Note that the Italian Stock Exchange is part of the London Stock Exchange thus offering FTSE Italia indices, but no local sustainability indices.

The German platform Nachhaltiges-investment offers an databank with over 40 index families by index builders from developed markets including one for Austria: VBV-Österreichischer Nachhaltigkeitsindex (VÖNIX)

Of course stock exchanges offer national and regional indices referring to their country, region, continent, currency zone and mid cap and small cap indices for smaller companies based on their assets & trade turnover. But apart from the above mentioned indices they rarely offer impact indices such as basic needs, impact catalyst, underserved communities or megatrends. Nor do they generally offer index families for vital sectors.

The World Federation of Exchanges (WFE) recently surveyed its 64 stock exchange members on Environment, Social and Governance ("ESG") activities. 46 responded and reported the following:

- More than 90% of responding exchanges have an ESG, or sustainability, programme in place, primarily focused on education initiatives for issuers and/or investors, but also including products primarily focused on education initiatives for issuers and/or investors, but also including products such as 'green bonds';
- Nearly 100% of respondents believe
they should monitor the long-term sustainability of their listed companies, and actively participate in developing better ESG reporting metrics;
- Over 85% of respondents said that some form of ESG disclosure was required in their market.
- Reported Investor demand for Green Bonds is still moderate with 7%, but interest in listing data metrics etc. is nearing the 20% the tipping point.

Note that Green or Climate bonds require impact metrics and reporting. There are sectors Standards developed by experts and Green Bond Principles for the financial part agreed upon by major banks.

Sustainability or Social bonds issued by multinationals such as Unilever follow practically the same framework, clear social aims and verification by ESG research bureau's. And also enjoy huge over subscription and low coupons of Green Bonds. Specific Impact Intended Investment Instruments are being introduced all over the place. They are more efficient for corporations than attempting to enter the sustainable darlings universe and get best-in-class financing rates. Standards investment instruments offered with a green prospectus get Green Bond treatment: over subscription and low coupons such as the Schuldschein (bond light) for Friesland Campina a Dutch dairy company recently issued in Germany. Spain's development bank just issued a 2nd Social Bond for sustainable SME and micro enterprises financing (500million Euro, mainly foreign investors).

This is all good news, but since there is no mention of impact, thematic or otherwise valued sustainability or innovative impact investing instruments I fear stock exchanges are shying away from more normative indices. 
Examples in this paper may seem incidental or as pioneers only relevant in the future, but developments are speeding up, in the following infographic recent trends in the impact investing market and the facilitating policies & instruments are shown.


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