January 2, 2019
Over the last few years, investors have been increasingly looking at investing more ethically.
For those looking to make the world a better place, but not wanting to sacrifice returns or profits, impact investing aims to support a positive social or environmental impact, as well as looking to achieve compelling financial returns.
Investing responsibly is not a new concept. Over a century ago, the Methodist church was instructing congregations to “do no harm” with either their behaviour or their assets, while mutual societies in the UK can be said to have been encouraging responsible investing for even longer.
More recently, in 2013, the Church of England was left red-faced when it widely criticised Wonga – a pay day loans provider – while holding a significant investment in the company through an investment fund managed on its behalf.
Impact investing, the latest form of responsible investing, goes further than just avoiding embarrassing conflicts; it can allow private investors to truly invest for the greater good, aligning their investments to their beliefs and values, without having to give up investment returns for a social return and vice versa.
It follows on from two earlier broad stages of development within responsible investing. Avoiding irresponsible or immoral activities is known as negative screening – that is, applying a filter to remove unwanted investments. These practices became known as ethical investing and over time, the investment community started to integrate information about businesses that were developed from environmental and social pressure groups.
These groups started to document the practices and policies of businesses, as well as how they were run, and this data drove the evolution of incorporating ESG (environmental, social and governance) considerations into investments. ESG investing became popular in the 1990s, where investors could apply filters to find well-run businesses. This approach is sometimes called positive screening, in part to distinguish it from ethical investing.
What became clear was that ESG considerations could be used as a proxy for a well-run business. Yet these businesses could still have a net negative impact on the world. Growing numbers of investors wanted to support businesses that had positive impacts; investments that are going some way to try to solve the major challenges we face: education, environmental degradation, healthcare, etc.
These are future-fit businesses – those that are truly sustainable. Looking for these net positive investments is at the heart of impact investing. It is no longer enough to not be bad; these businesses must be for the greater good.
Take tobacco as an example. Ethical investors might take the stance that an industry that is responsible for the deaths of seven million people a year is immoral. Their strategy would be to invest in everything but tobacco. While it is easy to identify the tobacco producers themselves, it is harder to target all parts of the supply chain; they would need to work on some sort of level of tolerance – for example, many supermarkets and general retailers will derive around five per cent of their sales from cigarettes and tobacco.
On the other hand, an ESG investor might look at the tobacco industry and select those with the most effective environmental practices, best safety records, most comprehensive employee engagement, etc. An impact investor would see the problem as one of healthcare or addiction, so their investments would be aligned to finding solution to these issues – biomedical research, cancer treatments, etc. Rather than avoiding the problem, they’re investing in the potential solution.
As impact investing is relatively new, there isn’t a large amount of historical data on investment performance. However, in 2015, Oxford University reviewed over 200 academic papers on the topic. They found that 80 per cent of the studies reviewed demonstrate that “prudent sustainability practices have a positive influence on investment performance”, which translates as suggesting that investing for impact could actually generate better investment performance.
While it’s relatively new, it’s no longer niche.
In fact, these sustainable investing practices were put into a global framework by the UN, known as the Principles for Responsible Investing (UN PRI). This year, the signatories to the UN PRI were managing around £50 trillion in assets. The largest of these is BlackRock, which is also the largest asset manager in the world.
At the beginning of 2018, BlackRock wrote a letter to every CEO they invest in and with, explaining that “every company must not only deliver financial performance, but also show how it makes a positive contribution to society”.
In other words, businesses should be doing financially well and also doing good for people and the planet.
Those that do this best are those that do well by doing good. And these are at the heart of sustainable investing.
Fairstone is one of the UK’s largest Chartered Financial Planning firms, with over 300 advisers nationwide. The company’s head office is based in Newcastle and it operates across 40 offices, including a significant presence in London.