Arisaig Partners’ Investment Philosophy is founded on the belief that Purposeful Growth – taking a multi-stakeholder view of the world – generates superior long-term investment returns in the emerging markets.
We therefore invest in concentrated portfolios of enlightened businesses which seek to benefit not just private shareholders, but for a wider segment of society.
Impact investing – investing with the intention to generate positive, measurable social and environmental impact alongside a financial return[1] – feels to us like a natural evolution of this philosophy. Two decades of bottom-up investing in the emerging markets has shown us how certain large, domestically focused, listed businesses can take on a great deal of the responsibility for driving social progress in these markets – for example, by making highly affordable household insecticides available to rural families to help prevent vector-borne diseases, or allowing communities to leapfrog brick-and-mortar banks with mobile financial services. For such businesses, the scope for impact generation and the long-term revenue growth opportunity are one and the same.
We believe we can contribute to meaningful impact by investing in the much greater reach of public companies combined with the patient, engaged, impact-focused approach of private markets impact pioneers. However, critics question whether investing in public equities can ever really have impact. We argue that it can – and needs to – be part of the solution, particularly when those investments are made in emerging and frontier markets.
[1] Global Impact Investing Network, https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing
The issue
The main criticism revolves around the concept of investor additionality i.e., the ability to demonstrate that the impacts of an investment would not otherwise have happened to the same extent without the intervention of that investor. In essence, the argument is that since publicly listed shares are simply ‘resale’, the shareholder is incidental to any impact generated by the underlying business – “it would have happened anyway”.
Our view
We believe this view of impact investing ignores the following factors:
Engaged shareholders make a difference.
The exclusion of public equity strategies from impact portfolios presupposes that the input of shareholders is purely financial. Engaged, constructive shareholders contribute far more than this – both in signalling and in active dialogue with the company – to spread best practice, promote better disclosure, and help keep management focus on long-term impact and financial goals.
Engagement on ESG issues can also help improve the ‘net impact’ of businesses contributing to development goals but facing other sustainability risks.
Secondary investors are a fundamental link in the chain to incentivise ‘fresh capital’ to be provided upstream.
Private market impact investors depend on the possibility of an exit (and thus the existence of a secondary market). As public market investors, we sit on the shareholder register of many relatively recently listed companies alongside established private equity funds.
Furthermore, it is illogical to assert that the equity financing we provide these businesses is somehow less impactful than those of other business owners on account of whether the initial investment pre- or post-dated IPO.
Equity investors in mature listed companies can impact the company’s access to capital and other costs of doing business.
Unquestionably, the ESG movement in finance has already increased costs for listed companies in socially harmful sectors such as fossil fuels and tobacco. Focusing on impact takes this a step further – it helps provide tailwinds to those businesses genuinely delivering solutions to some of society’s greatest challenges.
Furthermore, patient public equities investors provide an essential signal to these businesses that they can grow sustainably, in volume and affordability-driven fashion, maximising their long-term scale. The absence of impact investors from public markets greatly increases the odds that these businesses become pressurised into maximising short-term profitability at the expense of long-term impact.
Public companies are a crucial to solving global challenges
Established businesses in the public markets typically generate impact at a much greater scale than their earlier stage counterparts. Their beneficiaries number in the millions (or tens of millions). Economies of scale and/or proprietary technology are often fundamental ingredients in the mass-market delivery of essential solutions to development challenges. These characteristics more frequently attach themselves to publicly listed incumbents than to early-stage startups.
These arguments resonate all the stronger when the investments are focused on emerging and frontier markets, where: populations are largest and in most need of increased access to essential products and services; capital financing gaps are greatest; and domestic investors are generally less advanced at engagement. For us, it is therefore axiomatic that investors seeking to maximise the positive impact and additionality of their investments should seek out public companies in the emerging and frontier markets.
Meeting the UN Sustainable Development Goals in emerging markets in just five areas (education, health, roads, electricity, and water & sanitation) by 2030 will require additional spending of over USD 2.6 trillion[2]. If we are to have a chance at achieving these Global Goals, impact investors must leverage the public markets and must focus this capital towards the geographies and industries within it which can generate maximum impact.
The opportunity to provide people in developing countries with products and services they most need is almost unparalleled in scale within the public markets investment landscape. Those companies which generate maximum impact will be those which demonstrate genuine financial growth and sustainably and thus amply reward shareholders along the path of catalysing human development among the world’s largest populations.
[2] IFC Closing the SDG Financing Gap—Trends and Data (2019) https://www.ifc.org/wps/wcm/connect/842b73cc-12b0-4fe2-b058-d3ee75f74d06/EMCompass-Note-73-Closing-SDGs-Fund-Gap.pdf?MOD=AJPERES&CVID=mSHKl4S
