Many impact investors operate outside the stock market, directly financing projects where the relationship between financing and impact is crystal clear. Or they step into listed impact bonds around a specific project. The impact of listed equities is often less clear-cut. What impact do you achieve when you invest in a company with a diverse range of activities? Or activities that have no or perhaps even a negative impact? The answer from both equity experts is adamant: "We have a growing understanding of this."

Arjan Palthe: "Companies need to have a good impact story. However, investors also want to see the impact in concrete figures. Considerable strides have been made in this respect. We now know the exact percentage of revenue a company earns from goods and services with a positive impact. We receive that information from a dedicated team of 10 analysts and an external database."

The ability to measure more accurately and comprehensively allows impact investors to tap into a reservoir of impact potential. Listed companies are a crucial part of our economy, with many sustainable initiatives, activities, goods and services that deserve financing. Moreover, as a shareholder, impact investors have a seat at the table with management to ensure the company is firmly on the path to transition. Palthe: "As a long-term shareholder, we have influence, especially in the small and mid-cap segment."

A transparent impact strategy with clear criteria

Palthe manages Triodos Global Equities Impact Fund while Willems runs Triodos Pioneer Impact Fund. Both funds invest globally in listed equities, in large caps and in small and mid-caps respectively. Both funds share the same strategy: investing in companies that provide goods and services with a demonstrable positive impact.

Portfolio managers Arjan Palthe and Dimitri Willems

However, companies must first pass the robust and extensive standards screening process, Palthe says. The impact story must also fit one of Triodos IM's five interlinked transitions: Food, Resource, Energy, Societal and Wellbeing. These themes align with the widely used United Nations Sustainable Development Goals.

In Triodos Global Equities Impact Fund, on average, 58% of the revenue of portfolio companies is directly related to positive impact. This means that investors can see the impact content of the fund at a glance and compare it to other investments and to the market average of the benchmark. "The MSCI World global benchmark only provides 23% positive impact," Palthe says.

For Triodos Pioneer Impact Fund, the percentages are 67% of portfolio company revenue and 20% through the MSCI global benchmark. Portfolio manager Willems explains that the high importance of renewable energy companies in the portfolio is the reason for the even greater distance from the MSCI benchmark. "As far as I see, few other funds offer this transparency regarding impact on revenue. This provides us with a rigorous selection criterion: we only invest if more than one-third of a company's turnover is demonstrably linked to positive impact."

 

Impact in unexpected places

Finding impact in this segment means you must do your homework well, Willems argues. "Companies in renewable energy – wind, water and solar – offer obvious impact, but if you look beyond those well-worn paths, you can find other sectors and companies and you can make impact, even with car mirrors."

Willems points to Gentex as the perfect example. "This American manufacturer makes car mirrors that prevent you from being blinded by cars behind you. That literally saves lives, when you consider that there are 800,000 accidents a year in the US due to glare."

American company Advanced Drainage Systems is another example of surprising impact. The company produces plastic pipes for septic tanks and drainage. These pipes drain away water during floods and heavy rainfall, which are becoming increasingly common. Willems: "It’s incredibly useful. Although plastic may deter sustainable investors, the plastic used in these pipes is recycled from sources such as shampoo bottles. This material is less susceptible to damage and requires less maintenance than traditional concrete pipes."

Palthe acknowledges that impact is not always visible at first glance. "For example, we invest in technology companies that we see primarily as 'enablers'. They do not directly have a positive impact themselves, but their products or services enable other companies to make their production or products more energy efficient. For instance, chips that are 30 times more energy efficient than those from 10 years ago, or chips for the medical sector that improve patient diagnosis."

 

Review and outlook

"Looking back at 2023, we had a good equity year, especially in the large-cap segment," states Palthe. "This is thanks to falling interest rates - always important for equities - and the relatively strong US economy. At first, the US seemed to be heading for a recession, but the 'soft landing' turned into a 'no landing.'"

In recent years, market sentiment has been strongly driven by large technology funds, the so-called Magnificent Seven: Microsoft, Apple, Google, Amazon, Meta, Nvidia and Tesla. Palthe: "We only have Nvidia in our portfolio as the others do not meet our strict impact requirements.  With a return of 17% in 2023, Triodos Global Equities Impact Fund has not done badly at all versus the 20% of the benchmark - one-fifth of which consists of the aforementioned tech giants."

In the process, the portfolio has delivered investors an average return of nearly 9% over the past five years. Palthe: "Surely such a financial return plus the solid green and social impact is an excellent result."

The preference for (tech) large caps also put pressure on Triodos Pioneer Impact Fund. Willems: "Given interest rate developments, investors are just a little more cautious and prefer large companies which have already risen sharply. Over the past five years, however, the 9% average gross fund return remained slightly above that of the benchmark. The gross return in 2023 was 8.6%."

Both managers are positive about the future. "Investment risks are of course inherent in investing. We see more geopolitical tensions now - Ukraine and Gaza - but most companies are well able to withstand regional shocks, especially multinationals that operate globally," Willems says. 

Willems argues that the biggest risks usually come from unexpected quarters "It is not a new idea to say that the best remedy is a well-balanced portfolio. "Not only are there pure growth companies, as you often find in the small and mid-cap segment, but there are also more established companies with strong balance sheets and cash flow, such as those in the telecom sector where there is a lot of potential impact. Our investments in renewable energy last year affected the performance of the strategy. I believe that renewable energy could make a comeback this year.