Can you really have impact in listed equities?

Listed equity impact funds claim to offer an enticing combination: the convenience of liquid markets, with real-world impact. And investors are investing in them, particularly climate‑conscious and values‑led investors.

We remain cautious. Put simply, when an investor buys listed shares, they’re simply shuffling a share certificate from one shareholder to another. Nothing necessarily changes in the real world. There’s a shortage of additionality – a concept explored in the first article in this series.

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In this article, we’ll argue that listed equities impact funds can still have some impact, but the amount is generally so small that you’re typically better off spending your time on impact in private markets.

The arguments in favour of impact in listed equities

Managers typically make two counterarguments. First, that allocating capital to ‘good’ companies sends a positive signal to markets. Second, that stewardship allows investors to drive change.

Argument one: virtue signalling or real signalling?

The first claim is that by allocating capital to ‘good’ companies, investors send a positive signal to markets. This, in turn, is said to influence the cost of capital, making it easier for them – or similar firms – to raise funds in future.

For this to drive real-world impact, decision-makers would need to understand why capital flowed in a certain way. In practice, they only see that demand existed, not the reasons behind it. Markets are noisy and opaque, and any one asset owner likely represents a tiny share of flows.

Even where a company raises capital successfully, it is difficult to attribute that success to impact credentials rather than financial performance, timing or branding. This makes it hard for decision-makers to draw clear lessons or change behaviour.

Once we account for all this, is there any positive impact left? Probably, yes. But really only a very modest amount. Managers can amplify the signal by clearly communicating their investment rationale, for example to the trade press (or in other ways) but in practice this rarely happens at scale.

In short, the signalling argument depends on impact operating through a mechanism that’s indirect and very difficult to rely on.

Argument two: robust stewardship or mere showmanship?

The second, and more frequently cited, argument is that impact in a listed equities impact fund arises through stewardship – engagement and voting to influence corporate behaviour.

Done well, stewardship can improve accountability and drive change. But if this were the primary route to impact, portfolio construction would be driven by stewardship potential, investing in companies with the most scope for positive impact via stewardship.

This matters because not all instances of stewardship are born equal. Consider a fairly normal investment in a bank (which happens to finance fossil fuel projects) and a company making solar panels.

• As a steward to the bank, you might encourage the bank to stop financing new fossil fuel facilities. This matters. Research using Dealogic data suggests that bank lending is the primary source of financing for new fossil fuel facilities.
• With the solar panel company, you might encourage them to keep up their good work. But the company’s impact is “collinear” (i.e. correlated with its profit/revenue) so it’s unlikely to face pressures to reduce its positive impact.

Both are helpful, but they are not equally impactful. In practice, differences in impact can be large.

How do you ensure your stewardship is as impactful as possible? By prioritising the companies where stewardship can make the biggest difference. Yet most listed equity impact funds do not take this approach. Managers typically do not select companies based on their stewardship potential – they do not prioritise investments in banks which invest in fossil fuels at the expense of solar panel companies.

In their defence, this is consistent with most asset owners’ expectations. However it does undermine the stewardship story, demonstrating the construction of the fund is not generally aligned with the claimed route to impact.

Enough is enough? Why we should insist on a material amount of impact

Both arguments claim there is some impact. The problem is that the size of the effect is small.

Treating any marginal positive effect as “impact” can lead us down a slippery slope. Most companies deliver some societal benefit, otherwise there would be no demand for their products or services. Taken to its logical conclusion, even a broad market index such as the S&P 500 (say with a handful of exclusions) could be labelled as an impact fund.

That stretches the definition beyond what most people would recognise as genuine impact, and risks reducing the concept to the point where it loses meaning. It is not enough for there to be some impact. It needs to be material.

A listed equities impact fund typically won’t make the cut. There may be exceptions, but they are likely to be rare, so asset owners should start from a position of scepticism.

Where possible, focus your efforts on private markets instead

Instead of working on impact in listed equities, it’s generally more productive to focus on private markets. That includes questioning whether the strategic asset allocation is fixed – challenge your advisors on whether you can adjust it to have more exposure to private markets or impact-friendly asset classes. More importantly, it means putting effort into making those allocations as impactful as possible, which can include the considerations set out in the previous article in this series.

In the next article, we will explore whether being an impact investor requires you to compromise on your returns.

To find out more about how to make impact more meaningful in your portfolio, reach out to Sanjay Joshi, a consultant and impact specialist at Hymans Robertson.

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