How a dual mandate of returns and social impact could actually contribute to long-term returns
The Franklin Martin Currie Improving Society Fund does not own any of the magnificent seven. The fund has a dual objective: generate real world change and deliver long-term investment returns. The magnificent seven — Amazon, Tesla, Microsoft, Meta, Nvidia, Alphabet, and Apple — could all be argued to meet both objectives. They have changed our world through technology and they have certainly delivered significant investment returns. Lauran Halpin explains, though, that none of those companies are close enough to their eventual impact to qualify for this fund.
Halpin is head of impact equities at Martin Currie, a Franklin Templeton company. She explained the idea of an impact chain, meaning her fund looks for companies whose positive impacts on society are immediately measurable, rather than open to interpretation. She highlighted how her fund determines what a company’s positive impact is and how they achieve that stated dual objective. She argued, too, for an understanding of impact investing as an overlay that can actually contribute to returns.
“When you are looking for companies that are changing the world, these tend to be innovative companies. They often have leading market shares and really interesting opportunities for long-duration growth,” Halpin says. “Those companies are changing the world and we believe that they have the opportunity to grow their impact over time. By growing that impact, hopefully that means growth in top line margin, and all that feeds through to the opportunity to generate alpha in their share price.”
Explaining the measurability of positive impact, Halpin contrasted the companies in the magnificent seven with Intuitive Surgical. Where those companies have such a wide range of products and services that can be used for almost any purpose, Intuitive Surgical develops robotics that assist in surgeries. It’s the market leader for robotic assisted surgery and the delivery of its units to hospitals can be directly tied to better surgical outcomes and more efficient healthcare service. The positive impact of a company like Intuitive Surgical is immediately measurable and far less open to debate than an Nvidia or Meta might be.
Halpin accepts that by avoiding the magnificent seven over the past few years, her fund has missed out on some returns. She emphasizes, though, that at a certain period returns were so narrow that almost any equity investor was punished for being in anything other than Nvidia. However, she emphasizes the time horizon view that Martin Currie takes. Both stock value and positive impact can take a long time to play out. She believes, however, that a longer-term approach that integrates positive impact in a dual mandate on par with investment returns can drive value.
Positive societal impact is an inherently subjective ideal. We need only look at our own politics to see how widely different ideas of positive impact diverge. The Improving Societies Fund chooses three criteria that Halpin believes most investors would agree on as positive change: improving wellbeing, improving inclusion, and supporting a just transition. The idea of investing in companies that help people be healthy, actualize economically, and face big changes allow for a broadly agreed upon sense of positive impact, without forcing the fund to become thematic. Halpin notes that the portfolio is certainly not debate-free and that she welcomes asset managers sharing their views on the impact any one particular company can have.
Halpin is aware, too, that when looking at an innovative company there are chances their innovations may have less of a positive impact than intended. They may even have a negative social impact. Halpin treats that as a form of risk, one that she and her team mitigate by assessing governance and sustainability factors as well as any externalities or internal dynamics that could cause conflicts in the future. She argues that assessing the risks of these more negative uses can also help protect investors on the bottom line as a potential major negative development could hurt a company’s financial performance.
For advisors whose clients want to pursue ESG strategies, Halpin believes there may be a case for assessing impact funds. Not just from an idea of creating more social good, she believes impact can be a useful assessment tool that helps investors identify innovative leaders and potential returns drivers in the long-term.
“I think there has been a little bit of a danger with some of the more traditional ESG type funds that their reason for being can sometimes be a little bit murky and their outcomes, aside from Alpha, can tend to be poorly constructed, or at least poorly communicated,” Halpin says. “One of the things that I think is so interesting about impact is this focus on materiality and reporting of the outcomes, aside from alpha that we're trying to generate… You will be able to see how that dual objective is working. We want our clients to judge us on both the alpha and how we are at identifying companies with the opportunity to grow that cone of impact. We think that it takes the sustainable investing conversation a step forward.”
