Who are the impact leaders?

Sarah Norris, Investment Director, Aberdeen Standard Investments

Many European companies provide technologies, products and services that can deliver positive change for society and the environment. Yet not long ago one European company claimed top slot in newspaper column inches on this topic for all the wrong reasons.

In 2015, the US Environmental Protection Agency discovered that Volkswagen (VW) had cheated on government emission tests. Actual emissions of nitrogen oxides were up to 40 times higher than the levels found under artificial laboratory conditions. This news led to fines, a sharp fall in VW’s share price and management changes.

The episode had repercussions beyond VW. This example of poor governance had obvious negative environmental impact. It led investors to increase scrutiny of the social and environmental impact of European companies’ activities.

Today, Europe is quietly becoming a global leader in sustainable development.

Europe offers leadership

In 2015, the UN set its 2030 Agenda for Sustainable Development. This included setting 17 Sustainable Development Goals (SDGs) to help countries identify and tackle the most pressing global social and environmental concerns.

Europe has led the call to action.

Swedish climate activist Greta Thunberg sparked an international youth movement with her skolstrejk för klimatet. These students led a global climate strike, the largest international climate protest ever. Her campaign led Time Magazine to name her their person of the year. President Trump dismissed this as “so ridiculous”. By contrast, the response to climate change in Europe has been more positive.

European governments and regulators are leading the world in their commitment to addressing the SDGs. European Council president Ursula von der Leyen placed sustainability at the heart of her Strategic Agenda 2019-2024. She included specific guidelines for environmental and social policy. The most notable of these was a “European Green Deal”, which aims to make Europe the first carbon-neutral continent by 2050.

Under European Union laws, companies must disclose the most material environmental, social and governance risks to their business. They must also set out the processes and policies in place to address these risks.

These initiatives are changing corporate behaviour and improving business operations.

Recognised sustainability champions

European efforts to tackle the UN’s SDGs have not gone unnoticed. Corporate Knights conducts an annual survey to identify the 100 most sustainable companies globally.1 European companies claimed the top four spots. And they account for just under half of the full list. These companies offer:

  • better gender diversity
  • stronger governance
  • better remuneration policies
  • pay more tax
  • double the carbon productivity.

What’s more, investing in the most sustainable companies does not require sacrificing performance. From February 2005 to December 2018, the Global 100 most sustainable companies delivered a net investment return of 127% compared to a return of 118% for the MSCI ACWI Index.2

Yet sustainability is just the starting point. Some companies are looking beyond the risks and identifying potential business opportunities.

Investing for Impact

Impact investing allocates capital in a way that aims to intentionally deliver quantifiable positive environmental and social outcomes alongside financial returns. There is no ‘right’ approach to impact investing. However, the UN’s Agenda and the SDGs provide a widely-accepted framework for identifying the most significant social and environmental issues.

While measuring financial returns is relatively straightforward, quantifying this impact is more difficult.

The SDGs come with over 200 performance indicators to measure a country’s progress. We incorporate these indicators in our impact measurement. For example, in our Global Equity Impact Fund report, we not only calculate the reduction of CO2 emissions, we also analyse country-level implications. These measures can help investors look for companies offering potential solutions.

Clear impact

Europe offers many candidates. Its companies are at the forefront of impact measurement. The leading corporates can demonstrate how their business strategies are yielding more than economic profit.

The recent UN climate summit in Madrid highlighted the challenge of limiting global warming to 1.5 degrees C. The talks, however, led to few concrete plans. One company offering a key solution is Danish wind-turbine manufacturer, Vestas. Over their lifecycle, its turbines generate 30-50x more energy than they use. And they emit just 1% of the carbon dioxide per kWh compared to a coal power plant.3 This is clearly aligned with the UN’s goals of affordable and clean energy, and climate action (SDGs 7 and 13).

Water supports all life. Yet 785 million people around the world lack access to basic drinking water services and over two billion people lack an adequate wastewater system.4 French utility company Suez provides water and wastewater treatment services on five continents. Since 1990, its operations in developing countries have provided drinking water to over 19 million people and wastewater systems to over 9 million. These activities reduce poverty, provide clean water and sanitation, and help sustain life below water (SDGs 1, 6 and 14).

Not all impact investments are as obvious as wind turbines and water treatment. For example, few people realise that building construction and operation is responsible for over a third of global energy consumption – and nearly 40% of all CO2 emissions.

Irish insulation and building materials company Kingspan offers products that help conserve energy, reduce construction waste, and tackle climate change. The company provides investors with measures of its impact, a necessity for impact investors. Savings delivered by Kingspan’s insulated panel and insulated board products totalled 193 million MWh of energy and 38 million tonnes of CO2.5

Other businesses are adapting to survive in this new environment. Life sciences company DSM started life as De Nederlandse Staatsmijnen, or Dutch State Mines. It sold its petrochemical activities in 2002 and focused its strategy on creating a “healthy, functioning society for all”, with an emphasis on nutrition.6 This includes Project Clean Cow, a food additive that reduces bovine methane emissions by 30%. “Giving this to only three cows will have the same effect as taking one car off the road” according to the programme’s director.

What about returns?

Investors shouldn’t confuse impact investing with philanthropy. Impact investing offers a “double bottom line” where positive social and environmental change goes hand in hand with seeking financial returns.7

Track records for impact investing strategies in public markets are short. However, according to the Global Impact Investing Network, the majority of impact funds have delivered returns in line with or ahead of financial expectations.8 – although, of course, impact funds offer no more guarantee of returns than conventional funds and the past is not a guide to future performance.

There is no simple off-the-shelf measure of impact for global equity investors. Impact investing requires the resources to carry out fundamental analysis of both traditional measures of corporate success and environmental, societal and governance risks.

According to the UN, it will take investment of $5-7 trillion annually to meet its Agenda for Sustainable Development. This will create plenty of attractive investment opportunities for companies that align their activities with this agenda. Investors should seek companies that are best positioned to exploit these opportunities. Europe provides a fertile hunting ground.

 

1 Company website (www.corporateknights.com/reports/2019-global-100/2019-global-100-results-15481153/)
2 www.corporateknights.com/reports/2019-global-100/global-100-difference-15481154/
3 Company annual report 2018
4 World Health Organization. (www.who.int/news-room/fact-sheets/detail/drinking-water)
5 Company annual report 2018
6 Company website (www.dsm.com/corporate/about/our-purpose/heritage.html

www.gresb.com/double-bottom-line/
8 www.thegiin.org/research/publication/impinv-survey-2019

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Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.