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.
Given that all investments have an impact – by either supporting or not supporting a given organisation – directing money towards companies with sound long term prospects that are helping to address environmental or social challenges makes sense.
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:
- Intentionality – a clear aim to deliver positive outcomes.
- Measurement – checking that the fund is actually succeeding. A further feature of this area is its positive focus.
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.