KBIGI - Measuring Impact in Water
IMPROVING MEASUREMENT OF IMPACT IN LISTED EQUITY
KBI Global Investors and AP7 publish thought leadership Report on the Impact of investment in listed Water equities, highlighting its advanced Impact measurement methodology
In 2018 the SEK970bn (€94bn) Swedish national pension fund, Sjunde AP-fonden (‘AP7’), appointed the Dublin-based institutional asset manager, KBI Global Investors (‘KBIGI’), to a newly established ‘Green Impact Equity Mandate’ – investing in the firm’s pioneering Water strategy (launched in 2000). The natural resources specialist had – in the absence of any agreed or common approach to Impact reporting or Impact measurement – introduced its proprietary and breakthrough RASS (‘Revenue Alignment SDG Scores’) research methodology, which calculates the contribution of constituent holdings in its portfolios to delivery of the Sustainable Development Goals, just a year earlier. KBIGI and AP7 committed to developing even more advanced methods and metrics to measure the impact of its investments in listed Water equities from the off and are delighted to publish today an insightful new Report, ‘Improving measurement of Impact in listed equity’; encapsulating three years of research, the Report includes a highly granular exploration of Impact in three companies – China Water Affairs, Costain, and Consolidated Water.
Developing KBIGI’s Impact measurement methodology
“Financial return is easy to measure”, says Johan Florén, Head of ESG at AP7, “but that is not the case when it comes to measuring the benefit of an investment for society, where authoritative standards are lacking. When we started our collaboration with KBIGI, we agreed to work together to further develop methods and metrics for the measurement of Impact. After three years of work, it is time to summarize the lessons we have drawn so far.”
Catherine Cahill, Senior Portfolio Manager on the KBIGI Water Strategy, and author of the Report, explains the approach. “Through our collaboration, we have been able to build further on our expertise, tweaking our approach by focusing on just four of the 17 SDGs, as specified by AP7. We broadened our analysis to take a more holistic view of the companies, as opposed to focusing on their business activities alone and now look at both the company’s footprint [how it conducts itself] as well as its handprint [its products and service offering to the end user].”
The Report outlines how KBIGI came to develop an Impact scoring methodology with AP7. During this process, it:
- took in to account positive Impact considerations
- established adverse Impact indicators at company level
- went a step further, seeking to differentiate between companies as to their level of Impact
“The case studies in the Report show how we engaged actively with companies, targeting specific information gaps, whilst also outlining why and how we succeeded in driving better transparency of Impact information. This has ultimately served to make for a more robust Impact scoring system for companies, which can be used to form the basis of future monitoring and engagement.”
Florén concludes that:
- There is a lot to do for anyone who wants to play their part. Better data is, he says, “constantly in demand in all forms of sustainable investments”, and “active engagement is an opportunity to add value to pure investments”
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- Many companies can be developed with the right support from the owners, including when it comes to reporting
- There is a long way to go before we even begin to approach any form of standardized measurement methods. “Complexity is a challenge when comparing different companies with different products in different places, even when only one SDG is in focus. Quantifying the benefits is also a challenge, especially if the ambition is to sum up positive and negative impacts”
Key findings: identifying net positive Impact
- Investing in global water stocks, providing solutions to critical issues, has an Impact and serves to advance environmental and social goals. Measuring Impact is however both definitional and difficult, because:
- few companies report on their Impact
- the availability of information varies hugely, with no two companies measuring Impact in the same way
- there are a multitude of avenues of Impact
Having engaged with management teams in the water space, KBIGI and AP7 are encouraged to see more companies striving to provide better information for investors. “They appreciate the importance of increased transparency, and are making Impact a strategic priority”, says Cahill.
“This has no doubt been driven up their agendas by the evolution of reporting regulations and the advance of the highly anticipated European Taxonomy. That said, we acknowledge our role as active investors in driving this evolution.” While it is difficult to claim that investing in listed water companies has ‘additionality*’ in the purest sense – investors in public companies are not in control of strategic planning, capital budgeting, and/or resource allocations – Cahill argues that a “broader definition must include active ownership of companies that clearly advance societal goals and target positive Impact through their activities.”
The work undertaken by KBIGI and AP7 shows that Impact can be assessed in both quantified and subjective ways, with a holistic approach making the most sense. While many Impact measurements to date have focused on the positive effect of a company’s goods or services, the KBIGI/AP7 approach seeks to balance that with any related negative effect. “Our intimate knowledge of the companies we invest in, born of our active long-term ownership and frequent interaction with management teams, enables us to access and understand a level of granular information that otherwise would not be available”, says Cahill. “And, as our case studies show, we have been able to establish company-specific Impact assessments through our deep engagement with management teams. These assessments serve as a basis for ongoing dialogue. They are also tangible and can be monitored and, most importantly, they show these listed companies are having a net positive environmental and social Impact.”
Commenting on the new Report, KBIGI Head of Responsible Investing, Eoin Fahy said, “Measuring Impact poses a real challenge to asset owners and investment managers, given that few companies report on their Impact, and those that do report using different metrics. However, the work we have undertaken with AP7 shows that Impact can be assessed in both quantified and subjective ways. Our detailed knowledge of the companies in which we invest has allowed us to access and understand a level of granular information that would not otherwise be available.”
Concluding his thoughts on the research, and its key findings, Florén said, “Today, we observe initiatives in different parts of society that look for solutions and drive the development of evaluation methods for the societal benefits of investments. It inspires hope. We are happy that we, together with KBIGI, have been able to be part of that process.”
KBIGI and Water
KBIGI manages circa €2.3bn in Water assets – €885m of which is in a UCITS fund – on behalf of a global client base consisting of sovereign wealth funds, endowments, foundations, public pension schemes, sub advisory mandates and wealth managers.
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KBIGI is a pioneer in this area and has managed a specialist strategy investing in companies which provide solutions to global water problems – namely increasing supply and access, reducing demand and waste, improving and assuring quality, and building and repairing infrastructure – for some 22 years.
KBIGI invests in companies across the value chain, its diverse group of global companies serving municipal, industrial, and agricultural customers. Its water strategy represents a valuable and unique investment opportunity set, providing solutions which are helping to build a resilient, sustainable water value chain across the globe.
Click here to view Water Case Study
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* ‘Additionality’ as it relates to Impact investing means producing a beneficial environmental or social outcome that would not occur but for the investment in the underlying company.
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NOTES TO EDITORS
- About KBI Global Investors (‘KBIGI’)
Established in 1980, KBI Global Investors is a specialist institutional asset management boutique, offering a range of Global Equities and Natural Resources strategies. The firm manages assets for a broad range of clients – public and corporate pension schemes, sub-advisory investors, foundations and endowments, wealth managers, private banks and investment intermediaries included.
KBIGI has a global client base and today holds mandates in the UK, Europe, North America, and Asia, as well as for some of Ireland’s largest and best-known corporations. Part of Amundi, the firm is headquartered in Dublin, with a representative sales office in Boston, Massachusetts.
KBIGI’s focus on specialisation is extremely important in allowing the firm to generate excess return for its clients over the long term. The firm’s highly experienced investment team today manages €14.4bn, which is the combined AUM of KBI Global Investors Ltd and KBI Global Investors (North America) Ltd at 29th March 2022.
The firm is headed by CEO Sean Hawkshaw, with members of the KBIGI team holding 8% of the equity in the firm.
- KBI Global Investors and Natural Resource strategies
One of the firm’s principal goals is to be first to market with value-adding investment themes of the future. In the late 1990s, KBIGI was amongst the earliest investors to recognise the inherent source of alpha (the active return on an investment) from investing in companies providing solutions to sustainability challenges related to the provision of food, energy, water, and the mitigation of and adaptation to the impacts of climate change.
Having identified a compelling and clear need for investment in companies providing solutions to the global shortages of clean water and energy, the firm first launched strategies in these areas in 2000.
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Building up its team and intellectual capital in these themes, KBIGI added a climate change strategy in 2007, a sustainable impact agribusiness (food) strategy in 2008 and a sustainable impact infrastructure strategy in 2017. Its investment process has evolved over almost 20 years since the firm launched the first strategies with a higher conviction approach, which KBIGI believes to be the best way to capture market inefficiencies and generate alpha in these sectors.
From 2018 onwards, KBIGI has been reporting on the extent to which its Natural Resource strategies contribute to the achievement of the United Nations Sustainable Development Goals (‘SDGs’). This significant initiative involves the detailed classification of all revenues of the companies held in each portfolio, determining whether the activity from which those revenues arise is contributing, positively or negatively, to one or more of the SDGs.
- About AP7
AP7, Sjunde AP-fonden (the seventh AP Fund), is the State alternative to the private investment funds offered within the Swedish premium pension system. More than five million Swedes have their premium pension invested in the AP7 Såfa fund portfolio, with more than SEK970bn under management at 31st December 2021. With a diversified equity portfolio of more than 3,000 companies, AP7 has an ESG-strategy centred on universal ownership and impact, investing in companies that adhere to the numerous international norms and conventions signed by Sweden.
KBI Global Investors Ltd is regulated by the Central Bank of Ireland and deemed authorised and regulated by the Financial Conduct Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website. KBI Global Investors (North America) Ltd is a registered investment adviser with the SEC and regulated by the Central Bank of Ireland. KBI Global Investors (North America) Ltd is a wholly-owned subsidiary of KBI Global Investors Ltd. ‘KBI Global Investors’ or ‘KBIGI’ refer to KBI Global Investors Ltd and KBI Global Investors (North America) Ltd.
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