A Pragmatic Framework for Investing with Impact

We recently spoke to Prem Manjooran on his views of impact investing.  As he puts it, an intentional impact investment strategy should encapsulate investing in companies sustainably, where material social and environmental initiatives are included as purposeful strategic directives.  It should also include a focus on innovation that can drive competitive product and service differentiation, quantifiable operational efficiency gains, and sustained growth and profitability. A constructive balance between the two is essential.

In Prem’s selection of investee companies, he intentionally integrates a deep awareness of pressing societal issues and challenges into the evaluation process, mapping a rigorous security analysis of sustainable moats and profitable businesses, alongside an assessment of corporate capital allocation to effect positive societal change.  It is critical that periodic monitoring of the latter for changes over time is incorporated each time the investment thesis is updated and refreshed.

Prem believes that a consistent impact investment strategy cannot be divorced from the standard analysis of competitive strategic positioning, barriers to entry, supply/demand driven determinants of pricing, profit margins, and sustainable growth – otherwise it may not be commercially sustainable nor yield consistently sound investment outcomes.

In some areas, commercial goals can align more naturally than others.  Traditional investment analysis has generally ignored ‘social impact,’ or at best, treated it as a ‘cost-item’, while investors who prioritising Socially Responsible Investment (SRI) and Environmental, Social and Governance (ESG) goals have often eschewed a rigorous evaluation of business economics, free cash flows, and valuations. Prem finds it hard to see how an exclusive focus on nominal SRI/ESG compliance and impact without balancing these against standard fundamental analytics around competitiveness and profitability can fully capture all factors affecting companies into the future.

He says: “Our experience has led us to a conviction that innovative and profitable business models pay attention to all these areas.  For example, companies with strong product/service differentiation allowing them to meet business and societal needs, are most successful when they are also competitive in costs, marketing and other areas.  A healthy underpinning in profitability and free cash flow underscores the sustainability of the business model.  Companies that tend to systematically and consistently invest in areas like employee welfare, new product innovation etc, and are committed to corporate governance and accountability are those that build foundational resilience. And those who focus on product safety and efficacy mitigate risks of future faults impacting reputation and returns negatively.”

Impact Investing is however, not just about modulating regulatory, business, or reputational risk.  Prem believes an investment framework for sustained growth and profitability should anchor a sub-set of companies that: 

• diligently assess (and respond to) societal trends with real-time data;
• innovate relevant and differentiated products and services
• intentionally evaluate the commitments to all stakeholders, the environmental footprint, and the impact on industry structure, the competitive environment, and the evolving regulatory oversight.

He emphasises that as important as identifying companies which adhere to these tenets can be, avoiding investing in companies that extract rents in socially destructive ways is equally important. 

The court of public opinion, where intense political and regulatory scrutiny, can result in harsh penalties for companies that maximized short-term returns at the expense of the environment or society. This should be a clear deterrent for irresponsible business practices. Business activities putting customers at risk, those exploiting employees, customers or minority investors, are eventually likely to face existential business risk. At this point, even the most nimble may not escape the negative impact of rapid, sustained stock price and multiple de-rating.