Impact Investing

  • By Julie Mitchell
  • 13 May 2020

Making a positive impact through your investments

It’s not always easy to be positive about the future of the planet and its inhabitants.  The 21st century appears to have delivered a perfect storm of economic uncertainty, social upheaval and environmental change.  Many people are questioning whether the traditional approach to investment, which has advocated the accumulation of wealth at almost any cost, is too one dimensional.  Can such a single minded objective really insulate you from the many issues we are all facing?  Perhaps a broader strategy which seeks to invest for social and environmental benefit as well as profit should have a place in your portfolio.

What is impact investing

Impact investing focuses on selecting companies that have developed innovative solutions to large and growing societal and environmental challenges such as climate change, access to education or clean water.  It’s estimated that we need 5-7 trillion USD of additional investments every year to tackle the most pressing issues called the UN Sustainable Development Goals. As a result, impact investments offer significant long-term return growth potential.

Could we say the same of more traditional sectors such as tobacco and energy which have been so popular for investors over the last decades? These sectors which would not be part of a positive impact portfolio are currently facing large sustainability risks. Tobacco manufacturers, for example, have seen their share price falling over 25% over the last 2 years due to a decreasing demand for its products. Large oil companies have also faced a challenging environment over the last few years due to a falling oil price. Future regulation to limit climate change could even render some of their reserves as stranded assets, further depressing their share price.

A positive impact approach focuses on the faster growing part of the markets and as such can offer attractive diversification benefits to a more traditionally managed portfolio.  It also does not necessarily mean taking more risks.  An already significant and fast growing universe of investment opportunities allows investment managers to build portfolios suitable for all risk profiles. Some investors are also more comfortable investing in better-run companies, as it helps reduce the risks of potential scandals and significant losses.

Aligning your social values with your money

One option is to embrace different motivations and invest in what you believe in.  In recent years, more and more people are looking for their money to ‘do good while doing well’.

The emergence of impact investing – financial investments that produce significant social or environmental benefits, alongside an attractive financial return – provides an opportunity for people to become reconnected. Not just to their money, but also to the social and environmental impacts that this has.

Global issues, global opportunities

One previous criticism of investing ethically or sustainably is that returns had to be sacrificed. However, this assumption is increasingly being challenged. Indeed, a recent benchmark study from Cambridge Associates shows the opposite to be true.

Indeed, the positive impact approach itself favours companies that are trying to do good and run their businesses in a sustainable manner.  Such companies avoid fines and other penalties; they have stronger relationships with their customers, suppliers and employees.  Furthermore, they tend to operate in emerging sectors with high-growth potential.

Increasing availability

Impact Investing is becoming more and more accessible to investors with over 500 investment funds to choose from.  A number of new funds have been launched over the past two years, widening the access of positive investments to all asset classes.  Not only are these funds driving innovation in the sustainable investing space, but as more asset managers get involved and the competition increases, we are seeing a downward pressure on fund costs, directly benefiting investors.

Is it for everyone?

These impact investments can usually be held within an ISA, a general investment account and pension (SIPP) tax wrappers.

Today there is a real opportunity to create a more integrated view of finance where you can align your money with your values not only because that makes sense, but also because it is critical to building the kind of world we want to live in.

At Intelligent Capital, we are very excited to offer Positive Impact Portfolios to our clients and would love to discuss them in more details at your next review meeting.