Belinda Thomas, partner and head of investor relations at Triple Point, outlines the growing potential for investors to do well from doing good
The idea of ‘sustainable’ investment has been around for over two decades but it’s only been in the last few years that there’s been a shift in gear, an evolution of the concept that has enabled investors to see the idea as more than a philanthropic tool.
Investors increasingly want to do well from doing good. A growing number of them are pursuing ‘impact’ investing, a term that is used to describe for-profit investing in businesses that also have a positive social impact.
No longer is it enough for many investors that the investment schemes they commit to, such as ethical funds, just avoid social damage. Nor are they happy to give up a fair market return to support companies that make a positive impact, which is what many socially responsible funds offer.
Triodos, the sustainable bank, recently found nearly two thirds of UK citizens would prefer their money to support companies that are not only profitable but also have a positive impact on society and the environment.
Academic research also backs up this investment approach. Research from Friede, Busch and Bassen, authors of the Sustainable Journal of Finance, showed in a recent study titled ‘ESG and financial performance’ that in 90 per cent of 2,200 peer-reviewed research papers there was a positive or neutral correlation between the two.
Leaders of top investment houses such as BlackRock also agree that a more sustainable approach to business and investment is needed. In a recent speech, the firm’s chairman and CEO Larry Fink said: ‘To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.’
Impact investing is rightly seen as a subset of commercial investing that happens to be sustainable and make a positive impact. One of the rationales of impact investing is that the long-term risk adjusted returns will be superior because the investment approach is in tune with the forces shaping the global economy.
This is because it takes into account the risks and opportunities for businesses of transitioning to a more sustainable, low-carbon economy where companies will increasingly be penalised for their negative social impacts.
A review commissioned last year and led by Elizabeth Corley, chair of Allianz Global Investors, reported that ‘there is growing interest among individuals for their investments to have a positive impact on society as well as produce financial returns.’ The review also said that the impact investing market required further development to cater for retail investors.
In light of this, the government is backing moves to facilitate further retail investment into impact investing by encouraging greater transparency, a more robust governance framework and better measurement of outcomes, so investors can be clear on the positive impact their investments have made.
Only last week, the Department for Work and Pensions laid out plans signalling that pension schemes should target a minimum percentage allocation towards investments that have an explicit social or environmental purpose, as well as confirming its commitment to review social investment tax relief and further develop bonds that have a social impact.
We are operating now in an environment where environmental, technological and social change is happening faster than ever, which means it is impossible to ignore the global revolution of an inclusive and sustainable economy that positions positive change in society alongside positive financial returns.
There is a clear rise in the willingness of both advisers and investors to consider such investment opportunities. Earlier this year we launched the first impact EIS service that allows investors to benefit from tax reliefs associated with the government’s Enteprise Investment Scheme, whilst investing in British growth businesses that are making a positive impact on society.
We anticipate this area of EIS will grow strongly over the next few years as providers adapt their services to match investors’ greater focus on impact investments that make a positive contribution to society.
The early stage businesses that will be part of the impact investment managed service that we offer help to broaden the asset allocation of a typical investment portfolio. Such venture capital-style investments also have historically not been highly correlated with public stocks.
This implies that, although startup investing is risky, adding startup investments and other alternatives to a portfolio of publicly traded stocks and bonds can actually de-risk the overall portfolio.
Impact investing is no longer simply about avoiding investments in tobacco companies, or planting trees. Investors are still concerned about achieving higher returns with managed risks, but this approach is not simply catering to the investment philosophy of a cohort of progressive individuals.
Rather, it is actually fundamental critical insight into a company’s viability and potential long-term business performance, critical to all investors.