The Wire: Summer 2019It’s time to consider positive impact investing

It’s time to consider positive impact investing

Climate change protests have swept through the developing world and the human impact on the environment is headline news. David Attenborough’s Blue Planet started something of a plastic revolution, but there’s a long way to go and an awful lot of issues to address. At an individual level, once we’ve recycled, switched to an electric car and made our homes more sustainable, what else can you do?

Investments that do less harm and more good

The thing is, ‘ethical investing’ is quite a woolly term. There are several approaches and different fund managers, financial planners and institutions will have their own interpretation what constitutes ethical. Essentially, however, there are two broad approaches; negative and positive screening:

  1. Negative screening in the UK dates back decades. It was originally linked to the Methodists and Quakers, so became an investment philosophy associated with the church and charities. Effectively, investments that are considered harmful to people, culture or the environment are to be avoided.
  2. Positive screening targets companies which generate a positive social and environmental impact, with investors looking for businesses that clearly demonstrate corporate practices prioritising the environment, human rights, diversity and sustainability; often the opposite of negative screening criteria.

Combining negative and positive screening in investment selection was the basis for what became known as SRI; socially responsible investing, moving from a process focussed solely on exclusion, to one which saw positive engagement with companies with better environmental, social and governance (ESG) practices. The concept gained greater prominence after the 2008 financial crisis, with a sense that a failure of governance and increasing sociological inequality contributed to the crash. In addition to the business’ function and financial metrics, wider research was done into ESG factors such as:

  • Pollution and resource depletion
  • Diversity and employee relations
  • Working conditions, health and safety
  • Local community and conflict
  • Board structure and diversity
  • Tax strategy and executive remuneration
  • Donations, political lobbying and corruption

ESG is a much bigger debate than just the feel-good factor of ethical considerations. Advocates will argue that irrespective of the positive benefits, companies that follow an ESG philosophy will profit financially over the longer term, as the company’s values are now aligned with societal values.

The evolution to positive impact investing

You might wonder how impact investment might be different from ethical or ESG investing. In effect, it’s a natural progression from responsible and sustainable investing, that has evolved with society’s requirements and attitudes.

Impact investing is a more nuanced than the strict use of an ESG framework to filter immoral investments. Its core objective is to invest in companies that actively deliver a positive benefit to society or provide solutions to environmental and social challenges, alongside generating a financial return.

These investments typically focus on the opportunities created by the transition to healthy, low carbon and sustainable future investing in sectors such as resource efficiency, environmental services, water management, clean and renewable energy, and accessible basic services including housing, healthcare and education.

So, can you make invest positively and still make money?

Research has long proven that what is good for the people and the environment is also good for business. Academic research published in the Journal of Sustainable Finance & Investment analysed evidence from over 2000 empirical studies conducted between 1970 and 2014. The results show that the business case for ESG investing is empirically very well founded:

Around 90% of the studies found a positive ESG / corporate financial performance relationship.

UN Sustainable Development Goals

The Sustainable Development Goals were set by the UN in 2015 with the aim of being achieved by 2030. They are the blueprint to achieve a better and more sustainable future and address the global challenges we face today, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. These goals are being adopted by governments and businesses and the funds we invest in will often use these goals as a framework for the companies in which they invest.

What have we done about it?

At HFMC we have offered an advisory responsible option for some time on an ad-hoc basis, but are now pleased to put in place three new Positive Impact Portfolios. Given the broader range of suitable funds that have now become available, we are now at the point where we can deliver an equivalent Positive Impact Portfolio in terms of quality of portfolio construction as well as return ambition.

Why ‘positive impact’, rather than ‘ethical’?

Our portfolios for clients want to influence change for the better; for the planet and its inhabitants. The idea is to do less harm to our environment and more good to other people and to society at large.

We understand that people increasingly want their investments to have a positive impact in a changing world. Ethical investing has significantly increased in popularity and importance over the last ten years as society’s attitude to the environment has changed, led by the millennials and Generation Z. We must make better use of scarce resources and tackle issues such as climate change, the environment, resource scarcity, cleaner energy, ageing populations, equality, human rights and labour standards that drive today’s agenda in society.

Our three positive impact portfolios have the same risk and reward characteristics as our traditional Conservative, Balanced and Growth portfolios and several of the funds are the ethically screened versions of funds we already utilise.

Understandably, investors don’t want to compromise performance simply to satisfy their positive influence preferences. Our funds are selected on the quality of the management team, their track record and for the attributes it can bring to our portfolios, not simply an ethical intention. Across a portfolio that will typically hold 15-20 funds, we ensure the funds selected fulfil different roles, and monitor them to ensure they continue to achieve them. You can read more information on our investment philosophy here, or please feel free to get in touch with your financial planner.

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