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.
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.
Investing Themes
Following the invasion of Ukraine by Russia, European leaders have been reminded of the region’s high dependency to fossil fuels extracted in Russia. Addressing Europe’s energy independence is going to be a mammoth task, but increasingly necessary for politicians wanting to limit reliance on Russia. More than 40% of Europe’s natural gas imports come from Russia so achieving energy security will require a dramatic shift in policy. Fortunately, policymakers have several options.
We could see some of the dirtier fossil fuels such as coal used in greater quantities. However, a good proportion of Europe’s coal imports also come from Russia, and dirtier fuels would be counterproductive to existing climate change goals. There has been some discussion in the UK around whether fracking rules should be changed. But new natural gas-fired plants take two to three years to bring online.
There has also been some debate around how nuclear power can play a role in the energy mix. But new nuclear capacity is also likely to come online too late. Reactors regularly take more than 10 years to complete – construction of the UK’s Hinkley Point C began in 2018 and is not expected to come online before 2026, 14 years after it was first approved.
Fortunately, there is an attractive solution that is consistent with climate change goals and has shorter lead times: renewables. Unlike the years-long timescales for nuclear and gas, a solar installation will take approximately six months to bring online (depending on the size and scale of the project), while small-scale wind farms can be built in as little as two months.
The need to secure homegrown energy supplies and fight climate change, means renewables should be the key pillar of the new government energy strategy. This will help free the UK from dependence on imported oil & gas and spare households and businesses from the effects of wild fluctuations on global energy markets.
As such many argue the time for renewables is now and investing in a positive impact portfolios will provide you with exposure to this key theme.
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.