M&G Investments
The role of engagements and investor additionality in impact investing
Nayab Amjad, Senior Analyst – Impact Research and Christopher Andrews, Head of Engagement for Sustain & Impact Strategies at M&G Investments
Additionality – also known as contribution – is a core concept within impact investing. In this article, Nayab Amjad and Chris Andrews consider how impact investors can deliver additionality by engaging with investee companies, and highlight the important role of impact engagements in M&G’s public equity impact funds.
What is ‘additionality’?
The concept of 'additionality' gets to the heart of the central purpose of impact investing – using capital to tackle challenges in a way that it isn’t currently used, or tackling problems that aren’t currently being addressed. It refers to the contribution made by an investor or a company in tackling a societal challenge, where the positive outcome would not be achieved without that contribution (i.e. without the investor's role or the actions of the enterprise).
The topic is rising up the agenda, supported by recent regulatory developments, such as the FCA's Sustainability Disclosure Requirements. These emphasise that investor contribution needs to be central to how a fund's impact is articulated, while the additionality of the underlying investment as a 'solution provider' is also important.
In thinking about investor additionality, two primary aspects are usually considered:
Financial additionality: the impact is generated by financing a project or activity which would not have occurred without the allocation of capital
Non-financial additionality (e.g. via engagement): the impact is driven by the investor's activities in contributing to the positive outcome (beyond simply investing in the company)
For public market impact funds investing in listed equities, which generally deal in secondary markets where the direct funding of a project is not usually possible, investor additionality tends to centre on the role we can play in supporting, enabling or challenging the company on the overall impact it can generate. It should be repeated that we also focus on the additionality of the underlying company in tackling an under-addressed challenge or supporting under-served groups or regions. After all, how a company allocates its own significant capital can be an excellent driver of additionality. We believe the combination of the two aspects can be especially powerful.
For every investment in our public equity impact funds, we lay out an impact thesis or ‘Theory of Change’, which sets out how the investment is tackling a specific societal challenge. This potential positive impact is primarily driven by the company’s products and services, but we increasingly believe that investor contribution can play a role in achieving the impact, for example, through impact engagement.
The role of impact engagements
Multiple parties, including the Global Impact Investing Network, highlight that engagement is not just an important part of impact investors’ toolkit, but a necessary demonstration of investor additionality.
Impact engagements differ from ESG engagements. They focus on supporting or challenging the company to protect or increase its primary positive impact. These engagements can cover a variety of topics, but may involve pushing companies to set more ambitious targets for the impact achieved, supporting it to allocate capital more actively to impactful activities, or encouraging it to report more clearly on its potential positive impact.
Within M&G’s public equity impact fund range, impact engagements may form part of our approach to ‘net impact’ or ‘impact balance’. This usually involves identifying impact risks or actual negative impacts, and working to manage or improve these. Our impact engagements may also focus on linking executive remuneration to impactful outcomes.
Engagement programme: driving impact via incentives
Within M&G’s public equity impact fund range, we are implementing an impact engagement programme focused on improving impact measurability, developing more robust KPIs to directly measure each company’s impact, and linking executive remuneration to these KPIs.
The linking of compensation to impact helps to evidence how intentional or purposeful a company is, as reflected through its governance structures. This is one of the three pillars of our core ‘Triple I’ framework for assessing whether a company is eligible for investment in the funds. Linking remuneration to impactful outcomes also gives us confidence that the company will continue seeking to prioritise and expand its positive impact, rather than potentially diverting its activities elsewhere.
Furthermore, if there is a structural alignment between the company’s core business and the positive impact it generates, the company can reinvest the returns it generates directly into activities that produce further positive impact. We call this ‘double compounding’ – the potential for simultaneous growth of both financial returns and impact.
When identifying companies for this type of engagement, we consider how we can ‘move the dial’ and make a notable difference to the impact being targeted. We consider both the existence of impact-related metrics in the current compensation plan, and how material the impact is to the company’s core business – usually measured by the proportion of company revenues generated by impactful activities. Our highest priority are companies with a small or non-existent link between executive compensation and impact delivery, alongside a materiality that is below where it could be.
The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast.
Find out more on our impact hub.
This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
