Guide to impact investinG

For ProFessional or institutional investors only www.wellingtonfunds.com/globalimpact

invest in the world you want to live in

This guide provides insight into our impact investing approach; specifically, how we aim to generate attractive financial returns through investing in a diversified portfolio of high-potential, publicly traded companies whose products and services are geared towards solving the world’s biggest social and environmental problems.

As the need for innovative impact solutions grows, a new generation of companies is taking novel approaches and employing cutting-edge technology to address global challenges in distinctive — often disruptive — and profitable ways.

We believe that impact investing is compelling because it creates the opportunity to invest in the world you want to live in.

FeatuRes

03 Towards a better world

06 Our impact investing themes

08 Impact in action: Three case studies

www.wellingtonfunds.com/globalimpact

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towards a better worldimpact investing intentionally looks for opportunities to improve the world while seeking attractive financial returns.

solving big problems creates new business opportunitiesAlleviating hunger, expanding access to health care and bridging the digital divide may not be typical investment criteria for most fund managers. Yet these themes are among the primary objectives of impact investing. Recognising that the world’s biggest social and environmental problems can be significant business opportunities, impact investing intentionally seeks to improve the lives of people around the world, while seeking an attractive financial return.

By focusing on positive selection, impact investing differs from socially responsible investment (SRI), which avoids companies that trade in perceived social negatives such as tobacco, gambling or alcohol. It also stands apart from funds that invest in companies with favourable environ-mental, social and corporate governance (ESG) profiles. Impact investors go further than SRI and ESG funds by investing directly in companies whose core products and services address the world’s largest problems.

category definition objective

Socially responsible investment (SRI)/values alignment

Screens out irresponsible “sin stock” companies and/or invests only in leaders in sustainability

Social mission

Environment, social and corporate governance (ESG)

Integrates ESG risks and opportunities into investment analysis and dialogues with portfolio companies

Better long-term risk-adjusted performance

Thematic investing Invests in themes such as climate change or gender-lens

Investment opportunity

Impact investing Invests in companies that intend to have a positive impact on the world

Both measurable societal or environmental impact and financial return

sustainable investing universe

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evolution of impact investing Impact investing has existed conceptually for a long time; institutions like the World Bank have been engaged in similar forms of investing for over half a century via private equity or debt investments. It wasn’t until 2007 that the Rockefeller Foundation coined the term “impact investing”, which reflected the organisation’s belief that a mix of philanthropic motivation, technological advancement and economic incentive could be a powerful force for change.

Today, impact investing through public markets is in its infancy and evolving rapidly. It is clear that the noble efforts of non-market players like governments and NGOs are insufficient to solve pressing global needs alone. And while private investors have long been most directly associated with impact investing, there are limitations related to the scale and scope of private investments to address these challenges. A new cohort of public-market impact investors are quickly expanding the opportunity set, giving asset owners new ways to align capital with their world view, and playing a complementary role in the impact ecosystem.

Market-growth projections for the next 10 years are impres-sive. According to a 2014 United Nations (UN) report, the developing world alone faces a shortfall of approximately US$2.5 trillion in the amount of funding needed (after government and philanthropic largesse) to tackle the UN’s sustainable development goals.1

importance of innovation Innovation is the basis for most impact companies, though the businesses themselves vary considerably. While some are groundbreaking early-stage enterprises, many more are established companies that enjoy steady growth and competitive advantages, and still others are market-leading durable franchises with stable, defensive market positions. The critical common factor is that they apply disruptive ideas intended to have a positive influence on the world.

examples of Kpis

inputs activities outputs outcomes impact

Freedom from hunger Financial inclusion clean water education alternative energy

Spend US$400 million on animal health research and development

Effect 115 million mobile-banking transactions for Kenyan consumers

Install 7.3 million smart water meters

Provide 1.4 million Brazilian students with primary through secondary education

Produce wind power that avoids conventional power emissions equal to 2 million tonnes of CO2

For illustrative purposes only | Data sources for the information provided have been taken from multiple repositories including the following: annual and quarterly reports; industry research pieces; company web sites; press releases; case studies; and company engagements

“ innovation is the basis for most impact companies.”

measuring impact The ability to measure a company’s social or environmental impact is central to impact investing. We want to ensure that impact is core to a company’s mission, that its efforts are sustainable and cannot be duplicated effectively by other means and that its impact can be quantified. Key perfor-mance indicators (KPIs) developed for each investment opportunity help us clarify and track a company’s progress towards its impact goals. They also encourage account-ability and provide a different lens through which to analyse the company.

Developing strong relationships with our impact companies helps us understand their business models and determine which KPIs are most relevant. Building on academic

research, we have adopted a broad logic chain for measuring KPIs. Depending on the business, availability of data, and a firm’s awareness of their impact, our impact assessment will align with one or more categories within the logic chain. We document our work so that we can review and improve the process over time.

Gaining access to these KPIs is an important area of engagement. For every company in our portfolio, we also monitor and measure management and governance, market position and growth prospects, financial strength and business risk, and valuation and potential stock-price appreciation or depreciation. Our goal is to invest in a diverse set of sustainable impact businesses that can provide competitive returns.

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For example, biotechnology companies are working on breakthroughs in disease biology or cures for chronic diseases. Some companies provide solutions for microfinance or simple, affordable mobile-payment initiatives. Many businesses are working on waste-to- energy solutions and providing clean, non-carbon-based power. Other enterprises are developing differentiated solutions for clean-water access, water-loss reduction and water-treatment infrastructure.

potential investment benefits and risksAn impact investing approach can potentially serve multiple roles in a portfolio. First is potential return enhancement. Impact companies address large, underserved and rapidly growing markets and secular tailwinds will likely continue to drive investor interest in this area. Second, because impact companies tend to be underrepresented in traditional market indexes, an impact fund can help investors diversify their portfolios. Third, impact is an inefficient and inherently misunderstood area, which allows dedicated investors to uncover attractive opportunities. The complexity of critical considerations, a dearth of comparables and the wide range of potential long-term outcomes results in scant analyst coverage. Finally, investors can use public companies as a liquid complement to private impact investments.

“ the ability to measure a company’s social or environmental impact is central to impact investing.”

Impact investing is not without challenges. Investment horizons are necessarily longer — it’s impossible to change the world in six months — and return volatility can be well above average, given companies’ uneven growth paths and reliance on disruptive technologies. As with any investment, a well-executed, diversified impact portfolio comprising companies from many industries and regions can help minimise the negative effects of a single underperformer.

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requires a multifaceted approach, and publicly listed companies have a role to play, developing solutions like enhanced livestock husbandry initiatives, improved nutrients and more effective irrigation schemes.

HealtH Around the world, critical health challenges include the provision of affordable care, solutions for ageing popu-lations and effective treatments for debilitating diseases such as cancer and Alzheimer’s. Here, impact opportuni-ties exist in the study of disease biology, the development of novel drug platforms and advances in genomic research. Advanced health care delivery mechanisms include telemedicine, mobile clinics and remote labs that provide easy access to health care at a lower cost.

Broad impact areas, specific themes and sample businessesLife essentials Human empowerment environment

Freedom from hunger education and 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 Internet access • Data security • Identity protection

• Smart metering• LED lighting• 3D printing

affordable housing

• Low-cost mortgages• Housing management• Elderly care facilities

We aim to identify companies that are making an appre-ciable difference in solving the world’s most challenging problems. To narrow our universe, we focus on three broad impact areas: life essentials, human empowerment and the environment. We then hone in on more specific sub-themes where we think real impact is possible. These themes align with many of the UN’s sustainable development goals and are areas where we have clear views on investment potential.

LiFe essentiaLs Freedom From Hunger Despite advances made in recent decades in food aid, an estimated 800 million people still lack sufficient nutrition to lead a healthy life.2 Globally, this translates to one in nine people; in Africa, the figure is one in four. Tackling hunger

our impact investing themesWe focus on life essentials, human empowerment and the environment.

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Clean water and sanitation Improvements in clean water and sanitation can make a huge difference to quality of life in many parts of the world. According to the World Health Organisation (WHO) and UNICEF, approximately 700 million people — nearly 10% of the world’s population — lack access to safe water.3 Publicly listed companies in the developing world are often more efficient and effective than public utilities in providing desalination, developing water infrastructure and reducing public and household water loss.

aFFordable Housing The UN has calculated that over 100 million people were homeless in 2015.4 Millions more — in advanced econ-omies as well as the developing world — struggle with substandard housing, including urban slums. As credit and regulatory obstacles are overcome, public-company lenders and developers can more readily help provide access to suitable housing — including safe, reliable elderly care — at the lower end of the socioeconomic spectrum.

Human empoWeRment eduCation and training Lack of education is a key cause of cross-generational poverty, lower economic productivity and greater income inequality. Even marginal improvement can make enormous differences here. Supporting literacy programmes in Africa, for instance, where more than one-in-three adults cannot read5, or funding primary education to ensure that children stay in school longer can meaningfully improve the economic prospects of millions of people. The key is to make education more affordable. Companies engaged in distance learning and education financing are making strides.

FinanCial inClusion Access to basic financial services remains unaffordable for billions of people. Those without a bank account are at a perennial disadvantage, at risk from unlicensed money lenders and often stuck in never-ending cycles of debt. New, more accessible services are emerging, driven by technology and middle-class demand for more affordable financial tools. This area includes micro-finance, small- and medium-enterprise finance and mobile-banking applications.

digital divide and CyberseCurity A stark indicator of the gap between the developed and developing world — and between rich and poor within countries — is digital access. Poor Internet connections or outright lack of provision are barriers to achievement in education and business. And while billions of people still lack access, public companies are starting to have an impact. Mobile-phone companies are taking up the challenge of getting the poorest connected, telecommuni-cations innovators are bringing wireless broadband to rural communities and still other market disruptors are offering Internet services at a fraction of the cost of incumbents.

enviRonment alternative energy Companies are already working on myriad renewable energy projects, from wind power generation to photovoltaics, solar thermal, biomass and hydroelectricity. Electric vehicles and large-scale batteries have enormous potential and massive addressable markets. To date, just 6% of global energy consumption comes from alternative sources, but many countries are targeting much higher market shares.6

resourCe stewardsHip Population growth, urbanisation and industrialisation have made better resource management more important than ever. The UN estimates that over a billion people live in ecologically fragile environments.7 Here, waste-to-energy companies are working on better ways to reclaim materials; others aim to produce filters that remove toxins from the air and water.

resourCe eFFiCienCy Smart-meter technology for gas, water and electricity will have a positive influence on global environmental chal-lenges. Improvements in resource efficiency drive economic and social improvements. Thanks to current technological advancements, the move to better resource stewardship is already underway.

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impact in action: three case studiesGetting to work on digital access, climate change and immunotherapy.

What does impact look like in practice? Here, we share case studies of three companies that embody the kind of change we are seeking to effect. Each company exempli-fies the impact work that can be done and the potential financial returns possible.

Bridging the digital divide in BangladeshWe have identified a compelling opportunity in a company bringing Internet access and mobile connec-tivity to the people of Bangladesh. Access to the Internet expands markets, raises economic efficiency, creates economies of scale, boosts consumer welfare and increases citizen engagement. The telecommunications watchdog in Bangladesh estimates the Internet penetra-tion rate to be lower than 33%, with 43.4 million Internet connections for a population of over 150 million.8 This is far lower than many of Bangladesh’s neighbours, some of which have penetration rates higher than 80%.

There is ample room for growth, particularly through the use of mobile phones, which account for 97% of Internet use in the country. Our case-study company has 42% market share of the existing mobile market and enjoys exclusive rights to the 3G network. The financial

fundamentals are sound — the company has strong cash-flow generation, pays a dividend of approximately 4% and currently trades at a multiple of 15 times projected 2017 earnings. The impact element of this company is clear: it breaks down the barriers to Internet access, which has historically been impeded by the high costs of cable or fibre-optic Internet solutions.

In Bangladesh, rural and urban areas pose differing chal-lenges for providing digital access. This company’s proposed solution covers 99% of the population and reaches 90% of geographic locations. Additionally, the company’s village phone programme provides rural women with jobs selling products in communities that would otherwise lack both mobile Internet and mobile phone access. Through initia-tives like these, this company is helping to expand the digital universe in Bangladesh, and simultaneously promote the advancement of women and the poor.

a holistic plan for mitigating climate change The UN warns that the risks of inaction or delayed action on climate change are “overwhelming” and could lead to environmental damage on an unimaginable scale.9

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We have identified a Spanish company that seeks to mitigate the effects of climate change by developing, constructing and operating energy projects based on renewable technolo-gies — including wind, photovoltaics, solar thermal, biomass and hydroelectricity. The company aims to be a leader in the creation and management of infrastructure, energy, water and other services, while contributing measurably to social well-being and sustainable development. The management team is also determined to align these objectives with value creation for stakeholders.

The edge that interests us is the company’s comprehen-sive approach. By offering a complete solution from design to manufacturing to maintenance, the enterprise is compet-itive globally. This established firm has been in business for 80 years, starting as an engineering outfit before shifting its focus to renewable energy projects. With operations in 30 countries, the company executes its sustainability strategy according to a proprietary master plan. Its goal is to hasten the world’s transition to a carbon-neutral economy by applying innovative processes to all its projects.

This company’s efforts produced enough energy to power over six million households in 2015. Its revenues totalled €6.5 billion, while earnings before interest, taxes, deprecia-tion and amortisation (EBITDA) were €1.2 billion.

changing the approach to treating genetic disease Cancer is the world’s deadliest disease. Given ageing popula-tions in the developed world and behavioural changes in the developing world, the UN estimates that new cancer cases could rise to 22 million by 2030.10

We have identified a US biopharmaceutical company that is transforming the lives of cancer patients and those suffering from rare genetic metabolic disorders by focusing on cellular metabolism. The company is attempting to manipulate cellular functions in ways that enhance the body’s ability to defend itself against cancer and other deadly cellular defects and malfunctions. The company believes that being an early mover in this space will enable it to develop transformative therapies that can help millions of people.

Our research has confirmed this company’s commitment to patients, employees and shareholders. Its financials are on a solid footing as well. By aligning its remarkable scien-tific capabilities with core humanistic values, this company represents the type of impact investment that we seek to make on behalf of our clients.

a world without limits These three case studies exemplify the many forward-thinking, innovative and potentially life-changing impact companies that exist. They show that there are no limits to what can be done by public companies seeking to make the world a better place.

1 United Nations Conference on Trade and Development (UNCTAD), “World Investment Report,” 2014.

2 United Nations World Food Programme.3 WHO and UNICEF. “Progress on Sanitation and Drinking Water”, 2015.4 United Nations Commission on Human Rights.5 UNESCO Institute for Statistics. “Adult and Youth Literacy” UIS Fact

Sheet, September 2014. 6 BP, Energy Information Administration. 7 United Nations Environment Programme. “Sustainable, Resource-

Efficient Cities: Making it Happen”, 2012.8 Bangladesh TeCo Regulatory Commission. Estimate of Internet

subscribers in February 2015.9 Stern, Lord Nicholas and Ian Noble. “Achieving Low-Carbon Growth for

the World Bank”, 2008.10 American Cancer Society.

Case studies are for illustrative purposes only, they are not intended to constitute investment advice, there is no guarantee that an investment in any company, with the characteristics described, has or will be profitable.

“ this company is helping to expand the digital universe in Bangladesh, and simultaneously promote the advancement of women and the poor.”

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impact is opportunityWe seek to invest in innovative companies that can effect positive change while delivering attractive returns.www.wellingtonfunds.com/globalimpact

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