Our investment landscapes are changing. New risks like social unrest, extreme weather events, and geoeconomic stress have officially moved into the mainstream. One in two experts polled by the World Economic Forum expects risk levels to increase sharply this year and to continue climbing. The top five risks identified are geoeconomic confrontation (18% of votes), state-based armed conflict (14%), extreme weather events (8%), social polarisation (7%) as well as misinformation and disinformation (7%). These trends reflect a world where ethical foundations are eroding, amplifying instability and risk.
Institutional investors are already adapting, seeking to reduce exposure to uncertainty while prioritising stabilising influences in their portfolios. As impact investors, we must scale our efforts - not because the world is embracing ethics, but because its absence is fuelling systemic risks. To drive meaningful change, we need to expand our impact strategies into the mainstream, including the incorporation of listed companies.
Looking beyond the private markets
As we look for risk-adjusted returns, we cannot ignore the vast capital flowing into listed companies. Companies on the S&P500 each average around USD 35 billion in annual revenue. For the AEX (Amsterdam Exchange Index), it's around EUR 22 billion. As well as commanding large revenues, they have a huge impact through the products and services they offer, which we use every day. This impact can either be beneficial or harmful to people and planet. Listed companies also have a significant impact on the world around them through their supply chains, employees, social media presence, lobbying activities and consumers. If we want to meet our goals around sustainability and ESG, there’s no way around these giants.
There are plenty of additional benefits. Unlike private markets, listed companies offer much more liquidity. For pension funds, this can be extremely useful. There is also the potential for much more transparency, as listed companies must provide more extensive information to shareholders than private companies.
However, bringing listed companies into the impact universe does raise some potential concerns. Each one needs to be very carefully navigated to ensure that we keep the integrity of impact investing and avoid greenwashing.
Additionality in listed equities
The main issue with listed companies is the so-called additionality. Buying on the secondary market does not bring more money to the company. Therefore, you could argue that it does not create any impact. However, there is also something called the ‘signalling effect’: by directing capital towards companies that not only benefit our economies, but also people and the environment and demonstrating them in impact investing portfolios, investors can help scale solutions to social and environmental challenges. According to the Global Impact Investing Network (GIIN), investing in impactful companies can send a market signal, influencing other investors and company management to prioritise impact, potentially raising standards across the market.
Another way to create additionality is by practicing an active management style. When shareholders use their voice, they can influence the priorities of a company and hold leaders to account. We found that engaging with listed companies on topics like executive remuneration, reducing the use of plastics or including the interests of future generations in their business model can be very impactful.
The importance of impact objectives
This brings me to my next potential roadblock: finding listed companies that genuinely want to make a positive impact in the world and are prepared to work together constructively with like-minded investors. In the listed market there are a great many examples of firms pledging to reduce carbon emissions or deliver impact. But all too often these sentiments are not grounded in their business model and seem to be little more than window dressing. To overcome this potential block, we must look at the entire footprint of the company, and not cherry pick some siloed areas. As impact investors, we emphasise the importance of setting clear impact objectives, measuring results, and reporting progress, also in public equities. This creates accountability and ensures that the intentions to improve are being analysed and monitored.
Reconsidering our market benchmarks
Another challenge we need to address is around short-term expectations. Given the new risks we face, the market benchmarks we use today may no longer be fit for purpose. Today, our expectations revolve around the S&P500, which is heavily skewed towards BigTech.
To successfully incorporate listed companies into impact strategies, investment managers need to be brave and forward-looking. Expectations around AI-focused stocks might well be too high. And we know that misinformation and disinformation risks are on the rise too, which falls in line with AI hallucinations and unhealthy algorithms on social media. But despite this, many fund managers are still nervous to deviate from the short-term returns they offer. The Dutch pension funds who have led the way in divesting from these firms underperformed against the benchmark, which leads us to ask: who is the benchmark for? What is it measuring over the long term? And is it suitable when considering long-term market risks 20, 30, 40 or even 50 years down the line?
Intentionality doesn’t allow for being passive
Passive benchmarking in itself does not align with impactful strategies. To create a liveable world over the next century, investment managers must carefully consider which listed companies align with their objectives. To create real positive change through listed equity strategies we must pull all levers: active engagement with companies, intentional capital allocation, robust impact measurement and management, and signaling market demand for impactful business practices.
While it's important to appreciate nuance - no firm is 100% evil or perfect - fund managers must work with the best available information to adapt to the changing risks around us. It’s our job. Bringing listed companies into the impact universe doesn’t just acknowledge these risks but actively works to reduce them.
