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.
Impact investing can be a great way to add diversification to a standard portfolio. The positive impact approach leads to selecting companies that are generating solutions and run their business in a sustainable manner. Such companies avoid fines and other penalties and have stronger relationships with their customers, suppliers and staff. Furthermore, they tend to operate in sectors with high growth potential.
Impact Investing is becoming more and more accessible to UK retail investors, with close to 90 ethical and sustainable investment funds managing more than £13.5bn of assets currently available. In July last year, FE Trustnet published its inaugural ethical funds list and we expect to see further research demonstrating the business case for investors.
For more sophisticated investors, last year the UK Government became the first in the world to incentivise social investment through the personal tax system. Social Investment Tax Relief (SITR) allows individuals to deduct 30 per cent of the sum invested from their income tax liability for the current or previous tax years. However, the investment must be held for a minimum of three years for the relief to be retained.
SITR-qualifying investments have been restricted by the current £290,000 limit on the amount that organisations can raise. The Government has applied to the EU to increase the amount, with a decision expected imminently.
Impact investing is now accessible to everyone and not just limited to private equity investors, which had been the case a few years ago. With model portfolios and a growing number of funds eligible for Isas and Sipps, as well as general investment accounts and the introduction of SITR, viable options are now available for investors who care about how and where their portfolios are invested – regardless of affluence.
Damien Lardoux is portfolio manager at EQ Investors
The momentum behind impact investing is likely to be spurred on by the huge challenges facing the world.
Impact investing can be a great way to add diversification to a standard portfolio.
Impact Investing is becoming more and more accessible to UK retail investors.
