**In this section:** Impact measurement and management *>* Impact Steering Group *>* Importance of engagement *>* Expanding impact in emerging markets *>* 2021 outreach and collaboration *>*
Impact measurement and management (IMM) is a core component of our investment process, critical for evaluating a company's or issuer’s holistic impact — specifically, how its products and services contribute to our impact objectives. In 2021, as data availability expanded, industry standards improved, and interest in impact investing accelerated, we meaningfully built out our existing IMM processes.
Our IMM evaluation factors remain unchanged for 2022. For each portfolio holding, we:
As in 2021, the “portfolio spotlight” examples throughout this report aim to illustrate in-depth IMM analysis.
We use the Impact Measurement Project’s (IMP’s) five dimensions of impact norms and highlight key themes that have emerged during our company engagements over the course of the year.
IMM is critical for evaluating a company's or issuer's holistic impact.
IMM PRACTICE LEADER HIRED In April 2021, Wellington hired Oyin Oduya as Wellington’s IMM Practice leader. Partnering with our impact equity, bond, and emerging markets teams, Oyin serves as a dedicated resource focused on ensuring consistent, high-quality impact data and analysis. Her remit is to:
Facilitate our impact monitoring and reporting process
We look to build on the expertise of our IMM Practice and Oyin’s experience in private market impact investing to evolve our approach and align with industry-leading IMM standards.
IMPROVED DATA MANAGEMENT AND ANALYSIS We believe continual improvement in the collection and management of impact data allows us to analyze our impact more rigorously across asset classes, regions, and themes. Better analysis also embeds feedback loops in our process, which we believe can further our objective of optimizing impact across our impact portfolios. To that end, evolving our data management was a focus in 2021. In addition, the IMM Practice has worked to enhance existing approaches, for example, developing a new framework with the impact bond team to analyze impact risks and opportunities in multilateral development banks, using inputs like type of capital deployed, median income level of fund recipients, and banks’ ESG exclusion policies.
DEEPENED ENGAGEMENTS The IMM Practice took an active role in company engagements, deepening our insights into how products and services contribute to our impact themes and sharpening discussions with management teams about how companies measure positive and negative social and environmental outcomes. Our aim is to clarify our impact rationale, discuss impact trends, and suggest additional disclosures or new metrics where needed.
Regulators and industry groups have continued to push for convergence in impact and ESG reporting and standards. In late 2021, the International Sustainability Standards Board (ISSB) created the first globally harmonized sustainability standard for companies. The ISSB’s “building block” approach allows for the consideration of both financial materiality and stakeholder materiality. This is a practical way for impact investors to gain a more holistic view of a company or issuer.
As a member of the Sustainability Accounting Standards Board (SASB) Investor Advisory Group (expected to become the Investor Advisory Group for the ISSB), we intend to advocate for better data to inform our investment decisions. More standardized outcome-oriented disclosure on companies’ societal and environmental impact is critical to ensure that the impact investing industry can scale with integrity.
In 2022, we will continue to evolve our IMM process in line with industry practices, integrating regulatory developments and insights from our own impact research and data. The IMM Practice aims to strengthen its capabilities in support of the impact platform to help us more accurately measure progress toward our impact goals. We will also continue to work with Wellington’s investors and analysts, engage with company boards and management teams, and participate in industry impact initiatives. Our goal, as always, is to further our understanding of how best to maximize the real-world positive impact of the investments we make on your behalf.
Our dedicated Impact Steering Group (ISG) brings together Wellington’s impact investors and product managers, our ESG Research and Sustainable Investment Teams, and our macro strategists. Formed in 2019 and led by Portfolio Managers Tara Stilwell, Campe Goodman, and Liliana Castillo Dearth, the ISG focuses on:
LABOR PRACTICES IN THE SOLAR INDUSTRY China is home to approximately 80% of the global solar industry, including the production of polysilicon required for solar panels. The ISG weighed the subject of human rights, including forced labor in supply chains, against the positive climate impact of solar power. This discussion is ongoing. We plan to continue to engage with companies and industry organizations to determine the best path forward.
FINANCIAL INCLUSION The ISG recognizes the need for accessible mass-market financial solutions in emerging markets, where even the middle class is often underserved by financial institutions. We identified mobile banking solutions as critical technologies that facilitate financial inclusion, particularly in rural areas. Our Emerging Markets Impact Team contributed invaluable perspectives from its on-location grassroots research.
On these trips, the team focuses on researching country-specific differences in lower socioeconomic strata and the extent to which those nuances require discrete definitions and assessment.
We identified mobile banking solutions as critical technologies that facilitate financial inclusion, particularly in rural areas.
HEALTH CARE The ISG explored efforts by pharmaceutical companies to expand access to drugs in emerging markets, the role of health care technology in China, the evolution and development of new health care business models, and the vertical integration of health care services (particularly in emerging markets). We expect to explore this topic further in 2022.
CLIMATE ADAPTATION AND RESILIENCE Based on Wellington’s research collaboration with Woodwell, we discussed the role climate adaptation solutions can have in the context of our safety and security theme.
We believe building resiliency to climate change is essential to protect human life and property.
We believe building resiliency to climate change is essential to protect human life and property amid more frequent and severe weather events. Following the ISG’s review of this issue, our impact equity strategy invested in a US manufacturer of glass doors and windows engineered to withstand severe weather conditions.
INFRASTRUCTURE IN EMERGING MARKETS Historically, we have excluded infrastructure from our impact opportunity set because these investments do not provide additionality, meaning they do not address a specific need that is unlikely to be met by other agents. The ISG has revisited this stance amid the recognition of the important role infrastructure plays in emerging markets, where access to life essentials such as clean drinking water remains limited.
Provision of essential infrastructure in emerging markets also helps promote economic development and foster innovation. We continue to assess additionality on a case-by-case basis, but in general, we find the case is easier to make in emerging markets, where so many people lack access to basic services the developed world takes for granted.
We believe partnership and engagement with our portfolio companies and issuers can enhance their positive social and environmental impact while creating lasting value for our clients.
We see material environmental, social, and governance (ESG) issues as strategic business issues and believe that greater understanding of material ESG issues leads to more informed investment decisions. Through active ownership — including engagement — and multidisciplinary research, we seek to support our theory of change or impact thesis for each portfolio company.
During our engagements, we have three main objectives:
Our engagement creates an important feedback loop and mechanism for delivering and measuring impact.
In 2021, engagement remained a vital part of our investment process. The topics covered ranged from companies’ methods of support for their communities, employees, and customers to broader social and environmental themes.
With the 2021 United Nations Climate Change Conference (COP 26) highlighting the need for urgent action, we found boards and management teams more engaged on climate change and biodiversity. We discussed with many companies the effects of “the great resignation” as a fallout of the pandemic, and the need for strong talent management. Finally, supply-chain accountability was a key focus amid growing awareness of modern slavery.
Our engagements provide valuable and additive insight into companies’ strengths and weaknesses. These discussions also help us confirm that companies are delivering impact and have the potential to generate strong long-term financial returns. We are committed to evolving and enhancing the engagements we have on your behalf with investee companies and look forward to sharing the results we achieve.
ENVIRONMENT (E)
Equity: We engaged with a US-listed resource stewardship company that converts liquid and solid waste into energy on its CO2 emissions. While its business generates much lower emissions than landfills, this holding contributed the most to the weighted average carbon intensity of the equity portfolio in 2021. The engagement helped clarify the company’s sustainability goals. The company subsequently reduced CO2 emissions from its operations by 4.2 million tonnes at the end of 2021 and agreed to report progress on these reduction efforts on a quarterly basis.
Fixed income: We engaged on transition risk with a provider of renewables and other energy-efficiency solutions. The issuer has committed to reduce its Scopes 1 and 2 carbon emissions to zero by 2030 and set science-based targets for Scope 3 emissions. Through our engagement, we gained confidence that establishing these targets across Scopes 1, 2, and 3 emissions by the end of 2021 should enable the company to accurately measure its products’ efficiency gains and uphold its emission-reduction commitments. We will continue to engage on CO2 reporting and communication of Scope 3 targets and monitor progress on integrating its products in the circular economy.
SOCIAL (S):
Equity: An engagement with an Australian company that matches employers with job seekers centered on modern slavery issues and the protection of vulnerable job seekers. The company has developed a methodology for analyzing and managing exploitation risks integrating multiple factors, including US State Department data on human trafficking. It also closely monitors at-risk recruitment listings and performs deeper due diligence as needed. We will remain involved in assessing the company’s evolving practices and policies for combatting modern slavery.
GOVERNANCE (G):
Equity: Following a voluntary product recall, we engaged with the management team of a global health technology provider throughout the year to better understand and monitor the company’s processes and controls. On the back of these discussions, we eliminated the position, as we became less confident in the company’s ability to execute its strategy.
Fixed income: We met with a renewable energy company regarding its inaugural green bond issuance to assess its targets for increasing its capacity, as well as its plans for global expansion and its management of regulatory risk and level of independence from its ultimate parent. We were able to gain the necessary assurances that the issuer could — through this issuance — pursue new opportunities that would increase the scale of its impact, while managing the risks related to regulations and shareholder structure.
IMPACT (I):
Equity: Our discussion with a vertically integrated, low-cost health insurer operating in Brazil's rural markets allowed us to assess how the company coped with the second wave of COVID-19, which put significant strain on the health care system. Given our concern about potential health care inflation across Brazil in 2022, we also explored how the company plans to work with Brazil’s regulator to smooth out costs for its patients over time.
Fixed income: We engaged with a leading Latin American e-commerce platform to determine if the issuer met our impact criteria. Through our conversations and research, we were able to establish that a significant portion of the issuer’s gross merchandise volume was coming from small businesses. This insight gave us conviction that the platform plays a critical role in closing the digital divide and improving financial inclusion for small and micro-merchants across Latin America — furthering two of our impact bond strategy’s core investment themes.
For more case studies and a complete list of companies we engaged with in 2021, please see our Impact Engagement Report.
The examples shown are presented for illustrative purposes only and are not to be viewed as representative of actual holdings. It should not be assumed that any client is invested in the (or similar) examples, nor should it be assumed that an investment in the examples has been or will be profitable. Actual holdings will vary for each client, and there is no guarantee that a particular client’s account will hold the examples presented. Please refer to the Important disclosures section for information on investment examples. | E = Environment, S = Social, G = Corporate governance discussions; I = Impact. The companies shown comprise a partial list of all engagement meetings in which Wellington Management’s ESG Research and Impact Investing Teams participated in 2021. The specific securities identified are not representative of all securities purchased, sold, or recommended for clients. This is not to be construed as investment advice or a recommendation to buy or sell any specific security. The engagement case studies presented are for illustrative purposes only. They are chosen based on meetings held during the year and our priorities' focus, with the aim of giving insight into our process. There is no assurance the approach would hold companies such as these or that they would be profitable in the future.
Launched in January 2021, our emerging markets impact strategy is the most recent addition to Wellington’s impact platform, joining our global impact equity and bond strategies.
The approach aims to outperform its equity universe by investing in innovative companies focused on emerging markets, whose core goods and services address large social and environmental challenges across our Life essentials, Human empowerment, and Environment categories.
Portfolio Manager Liliana Castillo Dearth takes a bottom-up investment approach, informed by “grassroots research.” Liliana believes that, in addition to traditional company research, it is critical to understand domestic markets from within, including cultural settings and the hopes and aspirations of local business owners and consumers.
Liliana and her team travel to emerging markets across Africa, Asia, Eastern Europe, and South America, meeting with business owners and consumers.
This hands-on research has shaped Liliana’s views on impact investing by enabling her to get closer to the challenges facing emerging markets and understand how they can translate into potential investment opportunities.
Liliana grew up in Venezuela, where she saw firsthand the importance of sustainable growth and innovative solutions. During her youth, Venezuela was a prosperous country with significant economic potential. Today, however, the country struggles with endemic poverty and ongoing humanitarian crises.
With timber merchant in 2022
For Liliana, Venezuela’s downward economic trajectory and failed government policies personally underscored the critical need for impact solutions from capital markets; this was a key inspiration for her commitment to impact investing.
On her most recent research trip to India to understand the challenges in health care, digitalization, and clean power and transport, Liliana was thrilled to see the progress.
On her most recent research trip to India to understand the country’s challenges in health care, digitalization, and clean power and transport, Liliana was thrilled to see the progress made since her last visit in 2018. (One of our Health spotlights illustrates the investment opportunities this rapid development creates.)
Liliana’s meeting with a timber entrepreneur near Shahpura (in Rajasthan) offers a further example of India's advancement. When Liliana first met this small-business owner in 2018, he was working as an employee in another shop. He was able to start his own business with the help of a loan from a local bank. His business has since grown and expanded to include office space and a small fleet of commercial vehicles to transport the timber.
Liliana and her team look forward to returning to India, along with many other EM countries, to deepen their understanding of local markets and identify impact investment opportunities.
Timber merchant, 2018
PRI COP26 Investor Action on Climate MARCH
Phenix Capital Impact Summit MARCH
Financial Times Investing for Good Europe MAY
GIIN “Next Normal Now'” series JUNE
Responsible Investor Europe JUNE
PRI Association | The Sustainable Development Goals: identifying outcomes and setting targets JUNE
Portfolio Adviser ESG JULY
Insurance Risk & Capital Americas Seminar SEPTEMBER
Climate Action Sustainable Investment Forum North America SEPTEMBER
Economist Sustainability Week Conference OCTOBER
PRI Digital Conference OCTOBER
Financial Times Investing for Good USA DECEMBER
Responsible Investor USA DECEMBER
