MARKET MINUTE FROM BLACKROCK FUNDAMENTAL EQUITIES

How impact seeks to enhance the risk-return equation

Investing with the intent to do well while doing good is gaining traction. BlackRock’s Eric Rice met with the “Father of Impact Investing” to discuss the evolution from risk-return to risk-return-impact.

Impact investing, a rapidly growing segment of sustainable investing, aims to channel money toward companies that have a positive impact on the world in which they operate ― and to deliver outperformance for investors in the process.

Eric Rice, Head of Impact Investing within BlackRock Fundamental Equities and Portfolio Manager of BlackRock’s actively managed impact funds, hosted a virtual sit-down with Sir Ronald Cohen, the highly regarded “Father of Impact Investing” and author of the new book Impact: Reshaping Capitalism to Drive Real Change. The conversation, available here, covers the forces driving impact and how this style of investing is upending the traditional risk-return equation.

The new math

A major shift is underway as companies are increasingly measured not only on how much money they make, but also on the impact they are having. Rather than judging by risk and return alone, investors are looking at risk, return and impact.

Two examples: measuring companies on the impact they are having toward the achievement of the 17 United Nations Sustainable Development Goals, and measuring the impact they have on the progress toward the Paris Climate Agreement to limit global warming to well below 2 degrees Celsius. Mr. Rice says an extra $5 trillion of investment is needed to achieve these two goals ― and that public market participation will be critical in achieving it.

The myth of lower returns

One nagging narrative, according to Mr. Rice, is the idea that impact investing is a philanthropic endeavor that neglects the fiduciary obligation to maximize returns.

“This myth is now being exploded,” says Sir Ronald, noting that some electric vehicle companies are attracting lofty valuations, while some big oil companies have lost significant value over the past few years. “There are a lot of reasons why risk-return-impact [could] deliver better returns than just risk-return optimization.” For example, a company with a great product that does environmental harm, or uses child labor, could face consumer boycotts and sterner regulations, weighing on profitability.

Three forces driving change

Sir Ronald has been an impact investor for decades. But now, he says, there are three forces driving rapid change:

  1. The changing values of consumers, investors and society broadly.
  2. New technology that is enabling the delivery of impact.
  3. The ability to use computing power and big data to quantify a company’s impact.

“When you put these three things together,” he says, “you can see that this is going to have a huge disruptive effect on the business models of companies and on the portfolios of investors.”

Many companies are embracing this change in a “race to the top.” And where there is some resistance, investors can engage with companies to drive change.

“I think investors are certainly the ones driving companies now to look carefully at their impacts and judge whether their impact performance is likely to affect their future profitability,” says Sir Ronald.

Mr. Rice agrees: “I think impact engagement ― real engagement with those public companies to make sure they know what's going to be required of them ― is an important new stage for us.”

The future of impact investing

Sir Ronald sees this now-voluntary company embrace of impact measurement becoming mandatory over the next three to five years. Bringing impact transparency to public equities would be a game changer, he says, as companies are required to show the impact they are having on the environment, diversity, gender equality and other social problems. Companies may have to publish transition plans or risk losing investors. They may also struggle to attract customers and talent.

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This impact revolution is going to be as widespread and as deep as the tech revolution which has preceded it.

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Sir Ronald Cohen

The two believe this has significant implications for the nature of portfolios ― and that investors may expect a further shift toward companies delivering both profit and positive impact.

For more on impact investing, see 6 key questions about impact investing, where Mr. Rice addresses the what, who and how of the growing investment discipline. For his three-part conversation with Sir Ronald, visit BlackRock Fundamental Equities’ Expert to Expert video portal.

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Eric Rice
Head of Active Equities Impact Investing
Eric Rice, Managing Director, is Head of Active Equities Impact Investing.