Impact investing
An alternative avenue is to invest explicitly with a dual objective, targeting both competitive financial returns and measurable positive impact. We believe that by investing in solutions that address some of the most pressing global challenges, many of which have a strong social dimension, we can provide a highly additive approach that:
- provides exposure to sectors and companies/issuers across developed and emerging markets that may not be captured by more traditional ways of investing;
- enhances a portfolio’s overall stability through diversification; and
- offers measurable positive societal impact in areas such as education, affordable housing, clean water, financial inclusion and health care.
In our view, diversification can be enhanced further by impact-related fixed income investments as they allow investors to target promising areas — mostly not captured by public equity markets — across the full fixed income spectrum, from municipal to corporate bonds, and from government agency to social government bonds. Fixed income offers the additional benefit of being able to deploy capital at scale in response to immediate environmental or social challenges.
Case study: education
Education and job training is a key area for social impact. Solutions for improving in-person teaching and expanding remote-access education, especially for low-income populations, can have positive multiplier effects that may be widespread and enduring. We see this theme as an important diversifier as certain areas of education have historically demonstrated defensive qualities. We think attractive opportunities include:
- A for-profit health care educator, which facilitates access to quality medical training and education for demographically challenged and traditionally underserved student populations. We believe this provider is well positioned given persistent labour shortages in the health care sector. We are also impressed by its partnerships with universities globally to truly understand what is most important for students and what skills are in demand in the jobs market. From a portfolio construction perspective, the stock may offer countercyclical benefits as for-profit education is historically “defensive” in recessionary environments.
- An unemployment insurance agency, which helps unemployed people reintegrate into the workforce by providing financial support and job training programmes. We think this European agency’s social bonds offer the potential for both attractive returns and measurable social impact by enabling the agency to fulfil its role as a social safety net and provider of dedicated reintegration programmes for job seekers.
Bottom line
We think that an active focus on social risks and opportunities can help investors build more robust and diversified portfolios that benefit from exposure to the most innovative companies and issuers. We have identified three main avenues for capturing the attractive return and sustainability potential associated with social investing. In our opinion, they provide tangible examples of how the inclusion of social considerations can materially enhance traditional core portfolios.