BlackRock Fundamental Equities Insight

The case for impact investing in public equities

Sep 30, 2020
  • Brian Deese
  • Eric Rice
  • Quyen Tran

Impact investing is gaining interest as a growing share of investors seeks tangible progress on environmental and social goals alongside financial returns.

For a growing cohort of investors, financial returns aren’t enough. Those investors seek social and environmental progress in tandem with competitive investment performance. Impact investing through public equities provides an innovative mechanism to realize their objectives.

Impact investments are made with the intention to generate a positive, measurable social and environmental impact alongside a financial return. Its origins trace to microfinance where small loans funded micro enterprises such as farmers and entrepreneurs in remote villages.

Today, venture capital and private equity impact strategies play a critical role in building impact businesses across industries and geographies. However, the structure of private investing has prohibitive characteristics, including limited scalability and limited access to such investments for most investors.

We see public equity markets playing a growing and indispensable role in the impact ecosystem by driving impact and contributing at the investor, company and asset class levels:

Contribution from the investor

Public equities play a unique and complementary role in the impact investment ecosystem, offering solutions that private markets cannot and allowing more investors to participate in a space long available only to high-net-worth and institutional investors. To create impact, we see the following as best practices for impact investors in public equities:

Impact images

Contribution from the company

A business qualifies as impact only if it meets the criteria of materiality and additionality. We typically define materiality as having greater than 50% of a company’s revenues from products and services helping to solve a major social or environmental problem, as represented by our impact themes and the United Nations Sustainable Development Goals (SDGs) and underlying targets.

To meet the additionality criterion, a company’s products or services must address a need that is unlikely to be fulfilled by others (such as competitors or governments). The primary sources of company additionality are the application of leading technologies or innovative business models, as well as the delivery of a company’s products to underserved populations.

Contribution at the asset class level

The global need for impact capital is an order of magnitude greater than what could conceivably be provided by the private markets. For developing markets alone, we face a shortfall of approximately US$2.5 trillion annually to meet the SDGs by 2030.* Moreover, existing contributions from companies, governments and other organizations are not nearly enough to meet this need. Public equities and bonds offer the potential to put capital to work toward social and environmental progress at unprecedented magnitude.

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