Introduction

The Global Impact Investing Network (GIIN) has released a guidance note for investors on how to pursue impact in listed equities. The purpose of the guidance is to steer expectations regarding the inclusion of listed equity asset classes in impact investing.

Listed equities as an asset class

Public markets play an important role in the life cycle of companies and provide investors with transparency and liquidity. However, current definitions of impact investing have traditionally excluded public markets. The guidance notes that listed equities are idiosyncratic by nature, such that it is not possible to exactly replicate many of the impact practices used in other asset classes, and explains some of the differences such as, investor-investee relationship, liquidity and fluidity of the market, and access to data.

Key concepts

The guidance identifies key concepts as theory of change and investor contribution. A theory of change describes a sequence of cause-and-effect actions which will contribute to a set of targeted social and environmental results. The guidance highlights the unique attributes of impact investing in listed equities and notes that a theory of change should identify

• The specific problem(s) that the investment strategy will target.
• The beneficiaries (e.g., communities, places, groups) that would benefit.
• The changes or contributions that will come from investee companies.
• How the investor will contribute to that change and how the intended impact will affect portfolio construction and management.
• The non-financial targets that will play a material role in the selection of equities and ongoing evaluation of performance.

In the case of listed equities, there are generally two ways in which investors may deliver contributions. First, as a minimum, investors in listed equities should pursue contributions through engagement with their portfolio holdings to influence business strategy or operations in a manner that is directly tied to their theory of change. Second, beyond engagement, there may be additional circumstances where an investor can deliver positive market efforts to support their investees such as IPOs.

Structure of the guidance

The guidance is organized according to the key concepts of the GIIN’s Core Characteristics of Impact Investing and applied to the listed equities asset class.

This section highlights some of the specific practices that might be expected from an asset manager to achieve a positive impact in the listed equities asset class. In many cases, impact funds will include a layer of practices and processes designed to ensure that the portfolio manager is able to pursue positive impacts in an intentional manner while also avoiding significant unintentional harm or negative impacts on the same or other issues.

The guidance presents baseline practices, basic expectations, and examples for concepts including setting fund or portfolio strategy, portfolio selection, engagement, and use of performance data.

Conclusion

The guidance is designed to help asset owners better distinguish the differences between fund offerings in relation to their specific impact goals. It also aims to help asset managers understand the expectations that should be considered in fund and portfolio design.