Posted on: March 6th, 2018
With rapidly growing interest in the area of how investments can have a positive impact I was recently asked by FTAdviser to write a brief article on this topic.
In case you missed it amidst all the weather inflicted chaos last week you can view the full article here, or read the text below.
FT Adviser article by Julia Dreblow
A recognition that the world’s resources are finite and the desire to build the kind of society we want our children to grow up in, is the area of impact investment which is increasingly catching the imagination of the investment community.
Yet impact investment is relatively underdeveloped and not always understood – although the Global Impact Investment Network (GIIN) website is hugely helpful in this regard.
Impact investment, is commonly confused with ‘social impact’ where financial trade-offs and illiquidity may feature.
This makes ‘social impact investment’ better suited to institutional investors and ultra-high net worth individuals. The labels are however sometimes used interchangeably and both were considered in last year’s independent, government-backed Corley review: Growing a culture of social impact investment in the UK.
To be clear however, impact investment falls firmly within the remit of financial advisers as it includes investment funds and strategies that aim to deliver competitive returns with a positive environmental or social outcomes.
Research carried out for the Fund EcoMarket database in 2017 indicated that Liontrust, Rathbones, Quilter Cheviot (and Old Mutual), Standard Life Investments, BMO Global Asset Management, Impax, WHEB, Columbia Threadneedle, EdenTree, Royal London Asset Management, Jupiter, Janus Henderson, Sarasin and Partners, Stewart Investors, 7IM and Castlefield all have funds that focus on this area.
Research showed collectively they offer 40 (often well known) retail fund options that “aim to generate positive impacts”, 28 of which have also started to “measure positive impacts”.
Although many such fund managers have understood for decades that rampant short termism will leave both investors, and society, impoverished, the systematisation of impact investing is relatively new.
This is now being addressed by groups such as the UN PRI, with their sustainable development goals (SDGs) and active ownership groups, the GIIN alongside leading fund managers and environmental, social and governance (ESG) analysts, and underpinned by the work of the EU’s various bodies.
In the meantime, working out how best to articulate this area and explain its diversity is challenging. The UN SDGs are increasingly enabling a common language to emerge, but this also is still evolving. In terms of fund strategies there are the two essential components:
However, many funds that aim to deliver positive outcomes also have avoidance criteria that is more akin in ESG strategies.
Mike Appleby of Liontrust explained this using the example of climate change, one of his Sustainable Futures funds’ 22 themes (all of which have been mapped to the UN SDGs).
“We skew our portfolios towards companies that are part of the solution in terms of climate change as opposed to part of the problem. This means no fossil fuel producers but rather the more interesting opportunities we see in renewables and energy efficiency such as building insulation, more efficient lighting and smarter energy efficient grids,” he said.
Rathbones Ethical Bond fund manager Bryn Jones offered an investment example: “The fund includes both negative and positive screening. Both can help to add performance while delivering a social return. The fund recently invested in the Media Development Investment Fund (MDIF), which invests in independent media around the world, providing the news, information and debate that people need to build free and thriving societies.”
Amanda Young of Aberdeen Standard Investments takes a different view explaining that their new UK Equity Impact Employment Opportunities fund only lists positive criteria: “Our impact strategy aims to channel mainstream capital into companies whose intentional purpose and strategy focus on providing products, services and behaviours that help solve the world’s key problems. This approach naturally avoids those companies whose business activities harm society.”
In addition to investment selection there is also the area of investor stewardship which many would argue is equally impactful. Dominic Burke of Sarasin and Partners offers a flavour of this with regard to their new Climate Active Charities fund: “It also means engaging to ensure that the companies we invest in commit credibly to modifying their strategy in order to protect and enhance capital, and improving market-wide climate risk disclosure by engaging with auditors who are signing off the financial accounts of oil and gas companies,” he said.
Putting these strategies into a wider context, Adam Robbins of impact stalwarts Triodos explained how they look at this area: “Our six impact strategies range from energy and climate, inclusive finance, sustainable food and agriculture to sustainable real estate and socially responsible investments. All are key in the transition to a world that is fairer, more sustainable and humane.”
Other notable developments include EdenTree’s carbon footprint measurement work and the WHEB Sustainability fund’s impact calculator both of which can be viewed online.
Discretionary fund managers and portfolio planners are also increasingly involved. Castlefield, Tribe Impact and EQ Investors are three good examples. EQ’s Damian Lardoux said: “For us, fund managers should focus on the net impact companies are making primarily through their products and services and then at a second stage through their operations. The concept of additionality should also be at the forefront of their process to make sure that fund managers are supporting those companies without whom the positive impact would not have happened. Finally, while still challenging, impact fund managers should intend to measure the impact they are achieving as it pushes them to consistently reassess the suitability of each stock within their portfolio.”
My view is that although the process of assessing and articulating positive impacts is still evolving, the effort that is now focused on progressing this area is most welcome. Although some in the area perhaps rightly fear impact wash there is little doubt that the buzz that surrounds it is good news.
The metrics may not yet be perfect and strategies do of course vary, but the intention to deliver positive environmental and social impacts alongside sound returns is an excellent starting point, which will doubtless delight many investors.
Julia Dreblow is director at SRI Services