Investing in impactful companies
Environmental, social, and governance (ESG) investing has gained popularity in recent years as investors seek to align their investments with their values and avoid reputational and financial risks associated with companies that do not manage ESG risks effectively. However, ESG investing focuses on identifying companies that are managing ESG risks effectively, but it does not necessarily prioritise investments that generate measurable social or environmental outcomes.
Consequently, ESG investing has not been enough to address many of the social and environmental issues. We think that in order to ensure a sustainable future, rather than ESG investing, we need an investment strategy that is focused on impactful companies and outcomes.
Impact investing, on the other hand, offers the potential to generate both financial returns and positive social or environmental outcomes. Impact investing can be particularly attractive for investors who are seeking to have a measurable impact on specific social or environmental challenges, and who are willing to accept some level of risk in order to achieve this.
Measuring the social and environmental impact of investments is difficult and complex. It can be challenging to assess the impact of an investment in a way that is transparent, rigorous, and comparable across different types of investments. The Impact Management Project (IMP) was established to address this challenge by providing a framework and classification system for measuring impact that can be used by investors and organizations around the world. By using this framework and classification system, investors can gain a better understanding of the impact of their investments and make more informed decisions.
The IMP framework assesses investments across five dimensions of impact: What, Who, How much, Contribution, and Risk.
The What dimension looks at the specific outcomes that an investment aims to achieve, while the Who dimension examines the beneficiaries of the investment's impact. The How much dimension assesses the duration, extent and scale of the investment's impact, and the Contribution dimension evaluates the degree to which the investment has helped achieve the intended impact and how it has contributed to broader social or environmental goals. An important aspect of the Contribution dimension is that it measures the incremental level of impact achieved by the investment beyond the baseline level. The baseline level refers to the existing level of impact that would have occurred regardless of the investment. Finally, the Risk dimension looks at the potential negative consequences of an investment and the risks of not achieving the expected level of impact.
IMP has also developed a comprehensive classification system that categorises investments based on their impact on society and the environment across the five dimensions of impact. This system is made up of four categories: Causing Harm, A Companies (Avoids Harm), B Companies (Benefits Stakeholders), and C Companies (Contribute to Solutions). The system incentivises companies to improve their impact and advance up the classification ladder towards C Companies (Contribute to Solutions). It also equips investors with tools to assess companies based on their impact and to channel their capital towards promoting social and environmental change.
In conclusion, the IMP classification system is a valuable tool for investors seeking to make ethical and impactful investment decisions. By assessing companies across the five dimensions of impact, it provides a comprehensive and nuanced understanding of a company's impact on society and the environment. At ELM Responsible Investments, we use this classification system to identify and invest in the most innovative and impactful companies. What sets our strategy apart from other ethical funds is our focus on investing in the most impactful companies, rather than relying solely on ESG integration. We believe that to truly drive progress towards a sustainable future, we need to invest in companies that contribute to solutions and generate real impact, rather than simply avoiding harm. By leveraging the IMP classification system, we are able to direct our capital towards companies that are truly making a difference in the world, and create positive social and environmental change through our investments.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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Past performance is for illustrative purposes only and is not indicative of future performance.