By Jonas Wäingelin, NordicInvestor
Wellington Management continue to evolve their approach to impact investing in response to major trends, including the ongoing global pandemic, intensifying effects of climate change, and the shift to digital ways of living and working. As consumers increasingly see the value of solving major social and environmental problems for the benefit of people and the planet, companies and issuers have been incentivized to innovate and offer solutions. The result is an expanding public-market impact opportunity set.
The firm believe a focused approach of investing across 11 impact themes puts them in a strong position to capture promising new impact investing opportunities across developed and emerging markets. Wellington´s impact themes fall into three categories:
In the digital divide theme, they anticipate significant long-term demand for technologies addressing widening digital inequality across developed and emerging markets. In the health theme, Wellington are finding more companies and issuers looking to solve health-care-related challenges such as access to affordable care, inefficiencies in service delivery, and chronic underinvestment in delivery and health care infrastructure.
Today, the humanitarian crisis continues to unfold in Europe following Russia’s invasion of Ukraine. This tragedy is an urgent reminder for countries to reduce their dependency on fossil fuels and increase their focus on energy security and renewables. Wellington expect impact companies in the alternative energy and resource efficiency spaces to see accelerated demand as governments redouble their efforts to diversify energy systems.
The challenges associated with climate change more broadly remain a primary impact focus. Wellington’s ongoing research with our climate-science partners at Woodwell Climate Research Center underscores the urgent need to boost climate resilience.
Solutions to protect life and property from the effects of climate events cross several impact themes in life essentials, human empowerment, and, of course, environment.
Strengthening the engagement approach
Across the firms impact strategies, Wellington are committed to setting a high bar for materiality, additionality, and measurability. Through engagement, they seek to support their theory of change for each investment they make. Wellington also encourage companies to establish key performance indicators (KPIs) demonstrating positive social and environmental impact. In 2021, engagement remained a vital part of the investment process. The equity team held 224 engagements with 80 portfolio companies and 65 additional engagements with potential candidates for the portfolio. This was a 90% year-over-year increase. In the fixed income strategy, portfolio managers favor issues that incentivize issuers to improve their sustainability profiles and set targets with associated metrics. Engagements provide valuable and additive insight into issuers’ strengths and weaknesses. These discussions also help confirm whether issuers are delivering impact and have the potential to generate strong long-term financial returns. Wellington believe ongoing engagement with companies and issuers can help enhance their positive impact and create lasting value for clients.
Enhancing impact measurement and management
Impact measurement and management (IMM) is a core component of the investment process and critical for evaluating a company or issuer’s holistic impact. As data availability has expanded, industry standards have improved, and interest in impact investing has accelerated, Wellington have enhanced and formalized its IMM processes. During 2021, Oyin Oduya was hired as IMM Practice Leader. Oyin’s remit is to ensure consistent, high-quality impact data collection and analysis. The IMM Practice team has worked to improve existing approaches; for example, developing a new framework with the impact bond team to analyze impact risks and opportunities in multilateral development banks. The IMM Practice also took an active role in company engagements in 2021, deepening insights into how products and services contribute to Wellington´s impact themes and sharpening discussions with management teams about how they measure the social and environmental outcomes of their activities.
Reporting alignment with the United Nations Sustainable Development Goals
Wellington supports the 17 UN SDGs and believes the financial services industry has an integral role to play in bridging the funding gap to achieve them. While they invest in companies and issuers that align directly with their proprietary impact themes, they also denote the relevant SDG and target to which they contribute to better contextualize their activities alongside the great work being carried out by other financial, government, and nongovernment organizations. Increased reporting by asset managers on alignment with the SDGs facilitates the assessment of capital allocation to fund progress toward these critical outcomes. Wellington tag the underlying target to which a holding most closely contributes where applicable. While some of Wellington´s impact themes are not directly captured by the SDGs, they indirectly address several critical goals.
Expanding impact in emerging markets
Launched in January 2021, Wellington´s emerging markets impact strategy is the most recent addition to the firms impact platform, joining the global impact equity and bond strategies. The approach aims to outperform its equity universe by investing in innovative companies focused on emerging markets, whose core goods and services address large social and environment challenges across our life essentials, human empowerment, and environment categories. Portfolio Manager Liliana Castillo Dearth takes a bottom-up investment approach, informed by on-the-ground grassroots research. Liliana believes that, in addition to traditional fundamental research, it is critical to understand domestic markets from within, including cultural settings and the hopes and aspirations of local business owners and consumers. Liliana and her team travel to emerging markets each year to identify and assess new impact opportunities.
Disclaimer:
This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Forward-looking statements should not be considered as guarantees or predictions of future events. Past results are not a reliable indicator or future results. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
Issued by Wellington Management Europe GmbH, a firm authorised and regulated by the German Federal Financial Supervisory Authority (BaFin).
