Public Equity: A new frontier in impact investing
By Pilar Balet Robinson
Stone Soup Principal Consultant
October 3rd 2022
Matthieu Detroyat and Sonia Fasolo work at ELEVA Capital in Paris. They belong to that complex and technical field of work called Public Equity dedicated to invest in companies that are listed in the stock market. Investments that are usually driven by financial return, not so much the social impact they could foster. So… you might be thinking, how can public equity trigger social change?
When we talk about Public Equities, we speak about billions of euros following trends, moving powerfully across investment themes and strongly influencing the future of worldwide industries. It could be Technology, Energy, Infrastructure, Health… The 2020 GIIN Impact Investor Survey estimates the overall impact assets under management (AUM) at $715 billion. This level corresponds to a $213 billion increase from 2019. However, despite this remarkable relative growth (42.4%), public equity markets still had in 2020 a 100 times larger capitalization than impact investing, meaning investing in companies that are not just profitable but also driven by environmental, sustainable and social impact.
Using ELEVA’S Sustainable Impact Europe fund as their vehicle, Matthieu and Sonia are two of those unusual public equity investors working to increase that number and make impact investing a much larger piece of the cake. “We want to invest in companies that have at least 20% of their net revenue contributing to one of the SDG (Sustainable Development Goals) and can justify this contribution”, says Matthieu in the context of ELEVA’s Sustainable Impact Europe fund. At the moment, they have identified 230 companies in Europe that fit all their ESG (Environmental Social and Governance) and impact criteria, an overall number their portfolio has narrowed down to 40 after adding a financial analysis to the mix.
Data management, a major challenge
Transparency is one of the main challenges the impact investing sector faces everywhere. How can we be sure that these companies are achieving the social impact they claim to have? Data management is currently one of today’s biggest steps in the road to impact investing. “One of our roles with ELEVA was to validate the companies’ scoring based on the methodology ELEVA Capital has developed to classify the social and environmental impact of the companies in their portfolio”, says Sophie Robin from Stone Soup, the external consultancy supporting the production of the ELEVA Sustainable Impact Europe Fund 2022 Impact Report. For ELEVA Capital, additionality is an important component of impact investors: “We push our investee companies to measure their impact, we dig into their data and share the results on our portfolio. We feel they are improving a lot, data is slowly more accessible, and the process becomes easier”, shares Sonia from ELEVA Capital.
Today, listed companies usually communicate how they minimise ESG risks, but not so much the societal impact they generate. This step forward of integrating social impact scoring in the analysis of the candidate companies is where impact investing starts. “It’s a small niche, but we see it growing steadily,” says Matthieu. However, whilst many people do it by conviction, others have a more opportunistic mindset and do not play by the rules. “Today everybody wants to jump in the ESG wagon. By doing this reporting that integrates social and environmental impact metrics that have been validated by an external actor like Stone Soup, we want to preserve ourselves from impact washing and show that we are doing things properly”, shares Sonia.
Crisis: an opportunity for impact investing?
Times are moving fast and today we face a major macroeconomic crisis in Europe involving energy, economy and politics. The investment community is not comfortable with uncertainty and the possibility of pulling backwards and relying investment decisions only upon financial return is a real threat that will affect us all. How will the crisis affect the impact investing sector? On their side, these two experts feel optimistic and believe this crisis will be an opportunity for innovation and societal change. “We see a clear regulatory push from international public institutions for green energy and transition. Also, some innovations concerning green infrastructure, energy storage or electric mobility, for example, are going really fast. That’s why impact investment is so relevant today”, argues Matthieu.
Public Equity players like ELEVA Capital have an essential role to play in the investment community. They can influence companies and investors beyond financial motives by opening their door to specialized knowledge and experience in this field, thus setting a stronger path to impact investing. They can help increase in millions of euros the investments in companies that are creating real and sustainable solutions to the social and environmental issues we face today.
This is why developing a shared understanding of impact measurement and management, using widely accepted norms and standards such as the Impact Management Project’s classification for Investors, is crucial. “Our aim was to open a reflection around ELEVA Capital’s understanding of social impact. To debate about the company’s perspective of the different kind of social impacts and be able to move together towards more accurate criteria”, shares Sophie Robin.
Social change involves all of us, and very specially those whose decisions can affect the lives of many, every day and everywhere. Being able to work together with people like Sonia and Matthieu that are working to change the system in a very specific and influential sector, is also part of Stone Soup’s raison d’être.