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Impact investing in public equities: the good, the bad, the ugly

Here’s an interesting debate. Say, I want to invest with impact, and I invest in a public corporation. But my money go to someone who sold me the shares, not to the company itself – no matter how well it will perform on the “impact” front. Riddle me this: where is impact in such investments? If such an argument is justified, why are there so many “impact” strategies on the public markets?
We know that private markets (venture capital and private equity) play a critical role in building impact businesses. Imagine a microfinancing case, whereas invested capital is directly linked to entrepreneur. The impact of your investments in such case is direct and clear. If not for the microloan, the entrepreneur would not have been able to build the business. Now, the argument for public markets is not this straightforward.
In most jurisdictions private markets are associated with overwhelmingly high fees and are reserved exclusively for “sophisticated investors”. By this we understand financial institutions and Net-High-Worth individuals, who can bear the extra risk of such investments.
How should a “regular” person act within such constraints?
The size and impact potential for public markets is too large to ignore. To illustrate, the capitalization of global public markets is roughly 20x bigger than that of the private markets. If we accept that impact investing can only be achieved in private markets, we come to terms with that impact investing can’t solve the biggest global problems due to limits of private equity markets.
Investing into public markets with explicit impact intentionality is worthwhile.
By pursuing investments in a certain sector (e.g. renewable energy), you express the broader demand for the industry solutions within the domain. This signals other market participants that the sector in question is lucrative, and therefore, the sector will grow. This is much like voting for future economy. Perhaps, the individual investment won’t change much, but together the fund flows will make a difference.
If impact investing in public equity is possible, how do we do this?
As in many cases, the responsibility lies on the one who selects the assets to invest. If you are hands-on and pick up the investments yourself, there are several general principles that you can follow:
– Hold to your stock, strive to invest with a long-term, ownership mindset. Remember that your behavior has impact on other market participants. Stable stock dynamics may disincentivize a company to undertake opportunistic or disruptive changes. This can work both ways.
– Do not be afraid to ask questions. Don’t let the financial providers hide behind ESG check-boxes and abbreviations. Figure out exactly what you can tolerate in your portfolio from the different risk standpoints, and act accordingly.
– Stay open to new innovative solutions in retail investing. We see many new and smart ways to invest with impact. Accessible and transparent digital tools to invest your funds with a positive purpose. Make sure you are familiar with people behind such initiatives. Trust and alignment of values is the key.
Taking a different viewpoint, asset managers, wealth advisors, private bankers and digital investing platforms have a chance to play a big part in this story.
Taking a different viewpoint, asset managers, wealth advisors, private bankers and digital investing platforms have a chance to play a big part in this story. Client-facing financial intermediaries can and should take sustainability and impact into consideration. This is a part of their fiduciary duty, especially if sustainability is explicitly demanded by their clients.
Exercising impact is easier for a financial institution, than it is for an individual investor. This is due to several reasons:
– Asset managers have better access to the markets. This allows them to source better investment opportunities and bring the much needed visibility to undervalued high-impact companies
– Asset managers have more tools and expertise for engagement with companies to enhance their lasting impact. Pooling together their clients’ investments, asset managers have more representative power than individual investors
– Asset managers work with frameworks that allow them to see through “green washing” by researching the company’s ambition as well as practical output that the company can demonstrate.
This roughly sums up the argument in favor of public equity investing for impact. Together we can make a difference on the huge scale, fostering the future economies. Don’t get discouraged by the negative voices – everyone can do their part by investing responsibly and with intention to create positive impact.

About the author:

Marjan Tarnavsky is a regular contributor to Cyan Reef. He is a young impact finance passionate with background in banking and asset management across Eastern Europe and Canada.
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