Impact investing – investing for social and environmental impact as well as financial returns – is on the rise. In 2014, JP Morgan estimated that the market was worth $60bn (£43bn) globally – and growing.
The momentum is likely to continue, spurred on by the huge challenges facing the world: climate change, natural resource shortages and ageing populations, to name just a few, combined with a change in investor sentiment. More people than ever want to use the power of their money to do good, so how can retail investors get involved?
Socially responsible investing is not a recent phenomenon; it can actually be traced back several centuries.
Until recently, investing with a conscience meant excluding certain opportunities from your portfolio because they did not comply with the ethical criteria. Typically, these would be investments in tobacco, armaments or mining. This would lead to periods of underperformance when those sectors were offering good value. This meant that ethical investors used to pay a financial penalty for keeping true to their beliefs. Inevitably that greatly reduced the attractions of ethical funds.
More recently, a new approach has emerged: investing in businesses that make a positive contribution to society or the environment alongside an attractive financial return. This is a much more attractive concept. Many of these companies operate in growth sectors and investment is needed to develop, scale up and market solutions that address pressing global challenges.
Organisations such as the Global Impact Investing Network (GIIN) are dedicated to increasing the scale and effectiveness of impact investing. Currently, there are more than 340 investment products listed in the GIIN ImpactBase database. Each investment opportunity has to quantify its social and/or environmental performance in addition to the anticipated financial returns.
Investments can be evaluated using the following processes:
• Positive screening – aiming to seek out and include companies or industries that are actively involved in creating/generating solutions to social and environmental issues. Examples include: clean fuels, renewable energy, healthcare, recycling and sustainable agriculture.
• Negative screening – aiming to exclude harmful companies or industries, thereby avoiding certain social or environmental issues such as gambling or resource depletion. Examples include: animal testing, gambling, ozone depleting chemicals, pornography and tobacco.
Analysis can also take into account environmental, social and governance (ESG) matters relevant to a company’s strategy and operations.
The rapid growth of impact investing has been countered by concerns about simultaneously achieving social impact and market-rate returns. But a recent benchmark developed by Cambridge Associates and GIIN found that impact investing can capitalise on long-term social or environmental trends to compete with, and at times outperform, traditional asset class strategies.
The specialist investment manager, WHEB, has calculated that companies that fit their social and environmental investment themes (their investment ‘universe’) have a greater five-year historical sales growth (to March 2015) and one-year forecasted sales growth when compared to the MSCI World Index. This shows that you can have a positive impact without compromising on the return or income received.