M&G Investments
A framework for finding impactful companies with the potential to grow
John William Olsen, Public Equity Impact Fund Manager at M&G Investments
In this article, public equity impact fund manager John William Olsen talks through M&G’s Triple I framework, which is used to identify companies with the potential to both make a positive impact and deliver attractive financial returns.
The Triple I framework
The Triple I framework is our methodology for analysing the Investment case, Intentionality and Impact of a company, to assess its suitability for M&G’s public equity impact funds. Companies must score at least 5/10 for each of the three pillars, based on our assessment and ratings in a number of underlying areas, outlined below.
‘Double compounding’
Only companies with quality business models, capable of growing sustainably over the long term, will pass the Triple I framework. While this is important for impact investors’ objective of generating attractive financial returns, it also allows us to benefit from the concept of ‘double compounding’ – the compounding of both investment returns and positive societal impact over time. Given the fundamental 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.
Quality of the business model: We ascertain the strength of the business model by assessing elements such as: the sustainability of the business model; health of the industry in which it operates; the avenues to growth (organic and inorganic); and the company’s ‘moat’ (i.e. competitive advantages).
Competitive positioning: We are generally interested in companies with strong competitive positions in their respective industries, or with scope to grow this. Points of strong differentiation (e.g. customer relationships, distribution channels, economies of scale, brand strength) versus peers are also key.
Capital allocation: We consider management’s track record on capital allocation by assessing M&A appetite and execution; the overall strength of the company balance sheet (growth and leverage balance); dividend policy; and cash and capital management.
Business risk: We explore business and industry-specific risks that the company might face, and how material the effects of internal and external risks could be to the long-term sustainability of the business model.
ESG risk: We consider a range of environmental, social and governance issues that represent potential risks to the company, in areas like board composition, climate target setting and employee satisfaction.
Liquidity: The liquidity profile of the company is essential when establishing the investability of the candidate stock. We aim to create a balanced portfolio of impactful companies across the market cap spectrum, with liquidity management being an important aspect of portfolio risk management.
Mission statement and purpose: In most cases, the company’s mission statement, vision or purpose should generally reflect the impact case. This indicates that its purpose is heavily aligned to driving impact, giving us confidence that management is likely to operate with this in mind over the long term.
Strategic alignment and culture: We assess business performance under the management team’s leadership, consistency of the strategy and general market, and our perceptions of the management team. We also consider the composition and track record of the board, focusing on the independence, tenure and gender representation.
Implementation: Execution on the group’s impact case, and business alignment to this, is another measure we use to ascertain the candidate company’s intentionality. This may include its plans to reach impact targets and the progress or impact already created by the business.
Impact balance: We assess the primary United Nations Sustainable Development Goal (SDG) and key performance indicators (KPIs) the candidate company is addressing. We also consider any secondary SDGs and KPIs it is addressing, and fully investigate any negative impacts the company may have.
Measurability: This is the ability to measure the company’s impact, and generally represents the number of people impacted by a company’s activities or how far-reaching the impact is. Published disclosures may not give the full picture, so we may engage with management for more detail.
Materiality: This represents revenues that relate to sustainability or social activities (i.e. revenues to SDGs). We believe that if the revenues stemming from SDG-related activities are material in the context of the group operations, this will likely be a major driver of the strategy and represent sustainability of the positive impact created.
Additionality: We consider how the world/region would look if the company did not exist, by looking at elements such as the scale and reach of the company, and aspects of the business model that are difficult to replicate (e.g., the strength and scale of the distribution network).
Impact risk: We evaluate the likelihood that the impact will be different than expected, by considering factors such as the quality of the available impact measurement data, the probability of external factors affecting the company’s impact, the risk of the impact not being executed, and the likelihood of an unexpected positive or negative impact occurring.
Important Information
While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. 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.
