Impact investing is a small but rapidly growing subset of the ESG universe. Although there are many different definitions of impact investing, at American Century Investments, we believe it starts with a company’s culture and investment philosophy. American Century is owned by the Stowers Institute for Medical Research. Up to 40% of our dividend payments support the institute’s work on research into life-threatening diseases such as cancers, as well as developing treatments and preventions.
At American Century, we have developed our own Impact Generation Framework to ensure every investment we make is based on a demonstrable financial business case and a quantifiable impact on society and/or the environment.
This framework, which draws on the Theory of Change1, seeks to achieve positive change through two impact mechanisms2: 1) enabling growth by investing in companies with current or projected net-positive impact and 2) encouraging improvement through active engagement with companies.
The framework consists of five impact themes, each with their own subset of factors. Each theme is mapped directly onto the United Nations’ Sustainable Development Goals (SDGs) so investors can see how individual securities are linked to sustainability.
- Environmental protection: Solutions that drive positive environmental impact from the prevention or remediation of biodiversity loss to the mitigation of carbon, toxic air emissions and other hazardous releases to the transition toward a lower-carbon energy system.
o SDG Goals: Affordable and Clean Energy (7), Climate Action (13), Clean Water (6), Life on Land (15), Life under Water (14)
- Healthcare: Access to affordable healthcare, medical innovation, and more productive and efficient equipment, services and software.
o SDG Goals: Good Health and Well-Being (3)
- Sustainable living: The use of advanced technology to address urbanisation in harmony with our ecosystems, accelerating the transition to a circular economy and providing urban and rural populations access to a better quality of life, food security, efficient energy and transportation options, and basic services.
o SDG Goals: Sustainable Cities and Communities (11), Responsible Consumption and Production (12), Decent work and Economic Growth (8), Reduced Inequalities (10), Zero Hunger (2), No Poverty (1)
- Education: Access to the affordable transfer of knowledge, which can help lift people out of poverty and strengthen economic conditions and gender equality.
o SDG Goals: Quality Education (4), Decent work and Economic Growth (8), Reduced Inequalities (10), Gender Equality (5)
- Technological progress: Interconnected to the other four themes, this focuses on the development of paradigm-breaking technology that could improve society.
o SDG Goals: Industry, Innovation and Infrastructure (9), Affordable and Clean Energy (7)
To avoid “impact washing”, our impact framework does not permit investing in companies that are in violation of the UN Global Compact principles and that are on the exclusion list recommended by the Council on Ethics of the Norwegian Government Pensions Fund Global.
Candidates for portfolio addition must exhibit improving fundamentals and accelerating growth characteristics alongside current or projected revenue stream alignment with one or more SDG goals underpinning these themes. Each company is then evaluated to ensure potential to risks to impact are identified and adequality managed, using our proprietary ESG scoring system.
We then quantify the impact we expect companies to have. Where we cannot identify an appropriate metric, engagement with management is trigged to confirm a company’s SDG alignment and monitor progress toward SDG impact.
Impact is also measured by the portfolio’s allocation per impact theme and alignment with corresponding SDG goals as well as by an impact thesis which justifies the actions/solutions each portfolio holding brings to SDG issues.
The 17 SDGs are a cornerstone of impact investing. However, several are not directly investable by traditional definitions.
To link our five impact themes to the SDGs, we use a Sustainable Development Investment taxonomy developed by Dutch pension investors PGGM and APG. Between them, they invest more than €750 billion on behalf of pension funds in the Netherlands and have leveraged their scale and resources to find a way of making the SDGs investable.
This taxonomy allows our portfolio managers to make a clear impact investing case for each new company in the portfolio by tying them not only to our internal framework but also to the SDGs, demonstrating clearly what an individual business brings as a solution to one or more of the goals.
Australian and Canadian pension funds have also joined the Dutch investors’ SDG platform3. When it comes to impact investing, we believe pension funds can be a driver of significant positive change.
Real-world impact: Healthcare case study
Health Catalyst is a leading provider of data and analytics technology and services to healthcare organisations. Its customers leverage a cloud-based data platform to make informed decisions and realise measurable clinical, financial and operational improvements. The company has grown by assisting customers with data-informed healthcare decisions.
Within the healthcare theme in American Century’s Impact Generation Framework, the business fits with two factors: More productive and efficient equipment, services and software used for research, diagnostic tests and therapies; and new solutions that lead to lowering the cost of healthcare. These can then be mapped directly to SDG 3.4
Based on reported data and engagement with management, we have identified four sophisticated metrics5 to monitor the company’s progress and measure its impact:
- 2,300 lives saved through early detection, treatment, and appropriate surgical interventions;
- 50,000 more days of home treatment, due to shorter stays and reduced readmissions;
- 9,000 people receiving potentially life-saving preventative care through screening; and
- 2.2 million opioids removed from the community.
We use a proprietary ESG scoring system to generate quality ESG scores, which are considered in the context of our fundamental research.
While we found no evidence of certification to the ISO 27001 standard per best practices, Health Catalyst implements various controls to protect data and has not had any data breaches since its IPO in 2019. The company implements a strong strengths-based and engagement-focused approach to human capital performance. While R&D expenditure as a percentage of revenue (proxy for innovation) decreased 9% between 2017-2019, the firm recorded a three-year average of 34% R&D intensity. Based on our model, Health Catalyst’s governance profile compares favorably relative to its global industry peers.
By Guillaume L Mascotto, vice president, head of ESG and investment stewardship, American Century Investments
1 – Theory of Change is a methodology for impact evaluation. For more information, please visit: https://iris.thegiin.org/metric/5.0/od6350/
2 – For details, see Impact Management Project (IMP)’s classification of four mechanisms of impact: https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/A-Guide-to-Classifying-the-Impact-of-an-Investment-3.pdf
3 – Source: PGGM press release, 6 July 2020. https://www.pggm.nl/en/press/us-1-trillion-asset-owner-platform-launches-solution-for-identifying-sdg-investments/
4 – Source: United Nations. https://sdgs.un.org/goals
5 – Efficacy and treatment data provided by Health Catalyst for the period 2018 through the third quarter 2019, and can be viewed on their website: https://www.healthcatalyst.com/environmental-social-governance
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
A strategy or emphasis on environmental, social and gover¬nance factors (ESG) may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underper¬form or perform differently than other portfolios that do not have an ESG investment focus. A portfolio’s ESG investment focus may also result in the portfolio investing in securities or industry sectors that perform differently or maintain a different risk profile than the market generally or compared to underlying holdings that are not screened for ESG standards.
The opinions expressed are those of the portfolio team and are no guarantee of the future performance of any American Cen-tury Investments portfolio. This information is for an educational purpose only and is not intended to serve as investment advice.
American Century Investment Management (UK) Limited is authorised and regulated by the Financial Conduct Authority. American Century Investment Management (UK) Limit¬ed is registered in England and Wales. Registered number: 06520426. Registered office: 12 Henrietta Street, 4th Floor, London, WC2E 8LH.
American Century Investment Management, Inc. is authorised by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)). ©2020 American Century Proprietary Holdings, Inc. All rights reserved.
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