Impact investing: Increasing needs, broadening opportunities

We continue to evolve our impact investing approach in response to major trends, including the ongoing pandemic, intensifying effects of climate change, and digital ways of living, working, and learning. As communities increasingly see the value of solving major social and environmental problems for the benefit of people and the planet, companies and issuers have been incentivized to innovate and offer solutions. The result is an expanding public market impact opportunity set across developed and emerging market equities and fixed income. Here, we offer a brief update on our impact platform and approach.

Themes in focus

In our digital divide theme, we anticipate significant long-term demand for technologies addressing widening digital inequality across developed and emerging markets. In our health theme, we are finding more companies and issuers looking to solve health care-related challenges such as access to affordable care, inefficiencies in service delivery, and chronic underinvestment in health care infrastructure. The humanitarian crisis unfolding in Europe following Russia’s invasion of Ukraine is an urgent reminder for countries the world over to reduce their dependency on fossil fuels and increase their focus on energy security. We expect impact companies in the alternative energy and resource efficiency spaces to see accelerated demand as governments redouble their efforts to diversify energy systems.

The challenges associated with climate change remain a primary focus. Our ongoing research with our climate-science partners at Woodwell Climate Research Center shows the widespread need to boost climate resilience. Solutions to protect life and property from the effects of climate events cross several impact themes in our Life essentials, Human empowerment, and, of course, Environment categories. Wellington has expanded its focus on climate transition risks through a partnership with the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change. We also continue our leadership in the Net Zero Asset Managers initiative.

Impact measurement and management (IMM)

In April 2021, we hired Oyin Oduya as Wellington’s IMM practice leader. Partnering with our impact equity, bond, and emerging markets teams, Oyin serves as a dedicated resource focused on ensuring consistent, high-quality impact data and analysis. Her remit is to:

• Facilitate our impact monitoring and reporting process
• Provide useful insights to our investors and stakeholders
• Deepen understanding of the real-world outcomes of our investments

In 2022 and beyond, we look to build on the expertise of our IMM practice and Oyin’s experience in private market impact investing to evolve our approach and align with industry-leading IMM standards.

Importance of engagement

Engagement remains a vital part of our investment process. We believe partnership and engagement with our portfolio companies and issuers can enhance their positive social and environmental impact while creating lasting value for our clients. Engagements provide valuable and additive insight into companies’ strengths and weaknesses. These discussions also help us confirm companies are delivering impact and have the potential to generate strong long-term financial returns.

Through engagement, we encourage companies to establish key performance indicators (KPIs) demonstrating positive social and environmental impact. In our fixed income strategy, we can invest in issues that incentivize issuers to improve their sustainability profiles and set targets with associated metrics. Key engagement and research areas include:

• Talent management and the effects of the “great resignation”
• Supply-chain accountability and modern slavery
• Labor practices, particularly in the solar industry
• Financial inclusion in emerging markets
• Health care technology
• Biodiversity
• Climate adaptation and resilience
• Infrastructure in emerging markets

Expanding impact to emerging markets

Launched in January 2021, our emerging markets impact strategy is the most recent addition to Wellington’s impact platform, joining our global impact equity and bond strategies. The approach aims to outperform its equity universe by investing in innovative companies focused on emerging markets, whose core goods and services address large social and environmental challenges across our Life essentials, Human empowerment, and Environment categories.

Given growing interest from our clients and an expanding emerging market impact opportunity, we aim to continue our research to identify potential investments. Portfolio Manager Liliana Castillo Dearth takes a bottom-up approach, informed by on-the-ground “grassroots research.” Liliana believes that, in addition to traditional fundamental analysis, it is critical to research domestic markets in person. These trips are immersive experiences to understand cultural settings and the hopes, aspirations, and challenges of local business owners and consumers.

On her team’s most recent research trip to India to understand the country’s challenges in health care, digitalization, and clean power and transport, Liliana was thrilled to see the progress made since her last visit in 2018. In May 2022, the team headed to Indonesia to focus on understanding investment opportunities in infrastructure, health care, and digitalization. For the balance of 2022, she and her team have plans to visit Brazil to deepen their understanding of local markets and identify impact investment opportunities.