Social impact: Invest in the world you want to live in

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1 Social impact: Invest in the world you want to live in Eric Rice, PhD Portfolio Manager R. Patrick Kent CFA, CMT Portfolio Manager Andrew Snow, CFA Investment Director About the investment team and The Global Impact team averages 21 years of industry experience and is supported by the deep and broad resources of the firm. Tracing our history to 1928, Wellington Management is one of the largest independent investment management firms in the world. We serve as a trusted adviser for institutions in over 55 countries. Our innovative investment solutions are built on the strength of rigorous, proprietary research and span nearly all sectors of the global securities markets. As a private firm whose sole business is investment management, our long-term view and interests are aligned with those of our clients. IMPACT INVESTMENTS are investments made with the intention to make the world a better place while earning an attractive financial return. s Global Impact approach has identified over 500 public companies that directly address the planet s most critical social and environmental problems. By investing across a broad range of innovative, disruptive companies that serve large, underserved populations, we believe we can deliver competitive long-term returns while helping to have a positive influence on the world. Alleviating hunger; ensuring safe water supplies; increasing access to health care, education and financial services; reducing carbon emissions; and bridging the digital divide are among the objectives of the companies we invest in. Our portfolio companies are finding creative and profitable ways to service these large needs. In most cases, they are fast-growing companies whose potential is generally underappreciated by the investment community. Awareness is increasing, however, and the realisation that public markets are needed to meet the demand for impact solutions is reflected in the expansion of impact companies (Figure 1). While the impact ecosystem is still in its infancy, we expect it to grow considerably over the next 10 years. Figure 1 Our social impact opportunity set is growing rapidly 600 Number of companies Jun 2016 As of 30 June 2016 The universe represents s proprietary impact investing universe, which consists of public companies identified as impact companies. Sources:, FactSet

2 2 The world s biggest problems are also the world s biggest business opportunities. Peter Diamandis, CEO of the XPRIZE Foundation and co-founder of Singularity University US$2.5 trillion Estimated annual shortfall needed to meet the UN s sustainable development goals in developing countries Source: United Nations Researching and assessing impact companies To identify attractive social impact investment opportunities, we focus our research thematically, seeking companies delivering solutions in the broad impact areas of life essentials, human empowerment and the environment (Figure 2). To hone our investable opportunity set, we use a framework based on three criteria: Core: The majority of the company s operating activity must align with and advance our social impact goals. Additional: The social impact goals that the company addresses cannot easily be met by other means. Measurable: The company s social impact must be quantifiable. Then, to help us understand the level of impact companies are having, we collect and monitor key performance indicators (KPIs) to assess companies intended impact and track their progress towards that goal. For every enterprise considered for the portfolio, we analyse company fundamentals and long-term return potential, including: Management and governance Market position and growth prospects Financial strength and business risks Valuation and upside potential versus downside risk In the portfolio, we intentionally invest in a spectrum of companies including: New innovators: Early stage, highly disruptive, groundbreaking Sustainable growers: Established competitive advantages, significant growth path Durable franchises: Stable, high-yielding, defensive, industry leaders We believe this diversified approach helps balance portfolio stability with growth potential, while staying aligned with our social impact objectives. Figure 2 Broad impact areas, specific impact themes and sample businesses Life essentials Human empowerment Environment Sustainable agriculture and nutrition Education and jobs training Alternative energy Food safety products Crop-yield improvement Livestock productivity Distance learning Education financing Renewables Large-scale batteries Electric vehicles Health Financial inclusion Resource stewardship Novel treatments Mobile clinics Telemedicine Mobile banking Microfinance Fintech Waste-to-energy Carbon filtering Reforestation Clean water and sanitation Digital divide and cybersecurity Resource efficiency Water treatment Water-loss reduction Environmental remediation Affordable housing Low-cost mortgages Housing management Eldercare facilities Affordable Internet access Data security Identity protection Metering LED lighting 3D printing Autonomous driving

3 3 Innovation is intrinsic to social impact Life essentials Health Limited access to quality affordable health care, increasing ageing populations in developed markets, growing demand in emerging markets and the lack of effective solutions to many of the world s most chronic and debilitating diseases, make health care one of the most critical themes in our portfolio. Each year, 2.1 million people are infected with HIV, and 1.5 million die. 1 Breakthroughs in disease biology, the development of novel drug platforms and advances in genomic research have accelerated the rate of innovation across toptier biopharmaceutical companies, leading to a robust pipeline of new solutions to widespread chronic diseases. The development of advanced delivery mechanisms such as telemedicine, mobile clinics and remote labs is allowing for better access at lower costs. We are invested in a leading Japanese biotechnology company that we believe will distribute the first drug that can reverse the ravages of Alzheimer s disease by early in the next decade. This company offers hope for the more than 50 million Alzheimer s sufferers worldwide and has a long runway for growth. The strength of this pipeline is significantly underappreciated by the market. Human empowerment Financial inclusion Access to basic financial services remains an unaffordable luxury for billions of people around the world. In rural areas, proximity to banking infrastructure can be an additional challenge. The unbanked are at a perennial disadvantage and face constant economic risk. They are often at the mercy of usurious creditors, stuck in an inescapable cycle of debt. We expect the market for secure, affordable financial tools and services to continue to expand worldwide as middle classes in developing countries demand them and as rural digital connections improve. 38% of the world s adult population is unbanked. 2 include micro-finance, small- and medium-sized enterprise (SME) finance, community banking, cost-effective remittances and mobilebanking applications. We are invested in a Bangladeshi mobile-telecom company that provides connectivity to 57 million subscribers. With penetration high (it has 42% market share), its growth will come from expanding financial and data services, such as its mobile money platform that enables unbanked subscribers to transfer money safely and cheaply via a low-end feature phone. 1 World Health Organization, World Health Statistics, The World Bank, 2014 Global Index Database.

4 4 Environment Resource stewardship Population growth, urbanisation and industrialisation have made better stewardship of the earth and its natural resources more important than ever. Over one billion people live in ecologically fragile environments. 4 Each year, seven million people die from air-pollution-related illness. 5 The need for practical solutions to reducing carbon emissions and greenhouse gases, converting waste to energy, replenishing forests and addressing climate change is critical. Deforestation and other land-use changes contribute more than 30% of total global greenhouse gas emissions. 3 The waste-to-energy industry, which is on the forefront of these efforts, has a history of improving upon technology to offer cleaner, greener solutions. From better ways to reclaim materials, to filters that remove toxins from our air and water, to extreme-temperature burning designed to generate clean energy, these innovations have helped companies in this space become strong, durable partners in global climate-change efforts. We are invested in a large, established US waste management company that is expanding its best-in-class operations internationally. Each year, it converts 20 million tons of solid waste into electricity, enough to power one million homes. The company also recycles 500,000 tons of metal, enough to produce two billion aluminum cans. Life essentials Clean water and sanitation Access to clean, safe water is a basic human right, but for millions of people, it is elusive. Some of the greatest needs are in emerging markets, where many communities rely on unimproved water because water treatment simply does not exist or is provided by government utilities that operate extremely inefficiently. In addition to water safety, water scarcity and access to fresh water are also chief concerns in many areas. 600,000 Number of children under age 5 who die each year from diarrheal diseases 6 Improving access to fresh water includes water transportation services, desalination and technologies aimed at improving water-use efficiency, such as the deployment of smart meters. Demand for water treatment infrastructure is extremely high in many countries. Household solutions such as test kits and filters help, but are far from sufficient. We are invested in a company that builds and operates modern water and wastewater treatment facilities in China. It treats 250 million cubic metres of wastewater every year in communities that lack the service, and today it supplies over 92 million people with clean drinking water. The Chinese government has committed to improving the health of its citizens via cleaner air and water, as it has acknowledged that failure to do so would impede the country s economic growth. 3 United Nations Environment Programme. Our Planet, February United Nations Environment Programme. Sustainable, Resource-Efficient Cities: Making it Happen, World Health Organization 6 Water.org

5 5 The opportunity ahead High-potential social impact companies are doing what governments, philanthropies and industry incumbents have been slow or unable to do: make the world a better place and deliver attractive financial returns in the process. With pioneering technologies, forward-thinking management teams, and in some cases, creative business models, these enterprises are often highly disruptive to their respective industries. Many of the companies we invest in use technology that was unavailable five years ago, and we see few reasons to expect a deceleration in the innovation cycle. As technological advancements facilitate novel approaches to solving the world s big problems, and as millions more investors seek to align their investments with their values, the social impact universe should continue to grow. We believe that the key to investing in social impact is a disciplined research approach that focuses on identifying innovative companies that are dedicated to impact causes and have the potential to deliver attractive investment returns. While this double bottom line underpins the investment case for this growing market segment, we firmly believe that it is the opportunity to invest in the world you want to live in that makes social impact investing so compelling. It s always inspiring to me to meet people who feel that they can make a difference in the world. That s their motive, that s their passion. I think that s what makes your life meaningful, that s what fills your own heart and that s what gives you purpose. Maria Shriver, American journalist and social activist

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