Positive impact investing is a popular term these days and has become synonymous with investing in companies that do something “good.” This is understandable, but in our view unfortunate. Why? Because it opens the door to investment decisions that are built on the simplistic fallacy that companies that make something ‘good’ should also be good investments.

Themed funds are one example. They benefit from simple concepts, such as solving the world’s water problems or harnessing the power of the wind or the sun. These ideas sound good, look good and feel good, but are they any good? Often not, for a few very simple reasons.

First, these funds may not do what they say they do. The idea of a water fund, for example, can be very different from the reality of the companies they actually invest in. This could well be a manufacturer of expensive taps for luxury homes (not exactly helping to “solve” a water crisis) or a pump manufacturer that is 90% exposed to the oil and gas industry.

Second, thematic funds have far fewer investment options and so can be left backing the losers as well as the winners. Over time, returns between each stock within any theme will vary widely depending on stock specifics. That’s no good if you hold them all.

Third, the lack of options within any particular theme can lead managers to shoehorn ideas into their funds that are either poor investments or questionable in terms of thematic exposure (thereby diluting their exposure to the actual theme).

Fourth, there’s the law of unintended consequences. Thematic funds sometimes deliver unintended factor risks that can overwhelm stock-specific risks and contradict the intended theme.

We believe that sustainable investing can offer clients a positive impact with their capital, while also potentially outperforming the market. We analyze the positive and negative impacts of potential investments using three dimensions of sustainability: products, practices and improvements. Gaining meaningful insights necessitates that we think through second and third-order impacts in an effort to identify differentiated, sustainable, growth investments for our clients.

But here’s the thing: We don’t need to invest in wind turbine, solar panel, water pump or electric vehicle manufacturers to achieve a positive impact. Indeed, poor business models, weak industry dynamics or excessive valuations often prevent us from doing so.

Yet this does not mean that we aren’t committed to delivering a positive impact with our clients’ capital. We seek to uncover unappreciated gems with positive impacts even if this is not obvious at first glance. Sometimes this is through their practices (how they operate), but more often it’s through the more meaningful second-order impacts of their products. The challenge (and the opportunity) is that it takes diligent bottom-up research to find them.

We invest in many of these positive second-order impactors, but here are a select few to ponder: 1. Coherent is just a laser maker, however, their product is vital to produce OLED panels and electric vehicle batteries. OLED screens reduce energy consumption of smartphones versus LCD screens — that’s a lot of energy saved (if deployed across seven billion phones). 2. MarketAxess is just a bond trading platform, but it has increased price transparency and liquidity that makes trading fairer and more accessible to smaller traders. 3. WorldPay is just a merchant acquirer for payment processors, but it enables increased electronic ‘cashless’ payments, meaningfully reducing money laundering and corruption. 4. Mohawk is just a flooring company, yet its unrelenting focus on improving its manufacturing efficiency and reducing waste has resulted in it recycling over 6 billion plastic bottles, which it turns into carpet, in 2017.

All these companies were identified via our process of diligent bottom-up research. None of their second-order impacts are obvious. All of them are meaningful.

Craig Bonthron is an investment manager on Kames Capital’s equities team, responsible for co-managing global equities portfolios. Kames Capital plc is an SEC-registered investment adviser.

This material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable however, the author does not guarantee the accuracy, adequacy or completeness of such information. For further disclosures, see www.kamescapital.com/home_us.aspx.