As the climate emergency continues, the chasm between the very rich and the very poor widens and the accountability standards we hold global organisations to increase, many of us are being more purposeful with our buying decisions.
The sale of electric vehicles has increased tenfold over the past 5 years, whilst the sale of petrol and diesel cars is down by 25% in that time. Veganism is rising rapidly and overall we are adopting more sustainable living practices.
It makes sense that we want to make sure we are making responsible and sustainable decisions with how our money is invested money too.
Ethical investing has been around since the late 1970s but was mostly confined to a smaller segment of institutional and personal investors. Investors who wanted to avoid having their money invested in specific sectors; typically tobacco, armaments, alcohol, gambling and adult entertainment. The problem with this approach is that the investment universe is narrowed considerably, which increases potential downside risks and limits upside opportunities.
However, over the past few years, as we have become more aware of the harm we are doing to the planet and the species that inhabit it (including the most vulnerable or excluded of our own species), the ability to invest more positively has grown.
No longer does it have to be an either-or choice of investing for return or investing in line with our values. There is now the opportunity to do well AND do good, particularly as more companies consider the impact they have.
This new opportunity can be divided into two investment approaches: ESG and Impact Investing. The latter being further along the sustainable and responsible spectrum.
ESG. Not Being Part of the Problem
I’ve written about ESG investing here, which, in summary, is about investing in companies that are taking a positive approach to their environmental, social and governance practices (hence the ESG). It suits investors who want to be more conscious of their financial decisions but might not be ready to be too selective in how they invest. They don’t want to be part of the problem but still want to invest more broadly.
ESG investors accept that companies and sectors aren’t perfect but there will be some leaders in certain sectors, oil & gas for example, that are looking for solutions. It isn’t perfect though and critics will point to the issue of greenwashing (companies saying the right thing but not always doing so) and controversial companies included in ESG portfolios. Take Google’s owners, Alphabet, as an example. On the one hand, they are a diverse employer who disseminates the world’s knowledge to anyone with access to the internet. But, on the other hand, their use of personal data and avoidance of corporation tax contradicts the social and governance part of ESG.
It can help to think of ESG as being the option for people who want to do the right thing as much as possible but aren’t ready to go all the way. They want to cut their carbon footprint and reduce the use of plastic but still like the idea of foreign travel and enjoying fresh fruit and veg from around the world.
Impact Investing. Being Part of The Solution
Impact investing takes the decision to invest responsibly and sustainably a step further. It is for investors who are more conscious about where their money is. Those who not only do not want to be part of the problem, they would also like to know they are part of the solution.
Impact investing portfolios can be seen as seeking solutions to the world’s problems and are often aligned with the UN’s Sustainable Development Goals as a framework. At the same time, there are sector-based exclusions: tobacco, alcohol, armaments, and fossil fuel extraction.
Investment is made in companies that are well-run and at the vanguard of commercialised solutions to the world’s big problems and not necessarily the household names that would be popular in traditional investment portfolios. This means that returns have the potential to be higher but can’t be guaranteed. They could be more volatile or low relative to traditional equivalents.
That is not to say that having a positive impact is the sole determinant of whether a company’s shares are bought; there has to be an investment rationale for holding a company as well.
Doorman Policy
Think of Impact investing as a nightclub doorman. Some people will be ushered to the front of the queue; they are good people who are looking to have a good time but will do so in a positive way and get on with everyone inside. These are the companies that are having a positive effect on the world. For example, they may provide renewable energy solutions or provide technology that reduces the carbon footprint of their customers.
Some people might have had a bit to drink but they are OK; they haven’t had too much and just want a good time but the bouncer will keep an eye on them and throw them out if they get out of hand. These are companies that are deemed to have a net positive effect. For example, water companies which are improving water quality and availability overall but there are issues around sewage release and questions over executive pay. Impact investment companies will engage with the company to ensure negative issues are improved upon and remove them from funds if not.
The third group are those who have clearly had too much to drink or have taken something they shouldn’t. They will be idiots and cause problems for others. There is no chance they are getting in. In the investment world, these are the so-called ‘sin stocks’ of tobacco, gambling, armaments, alcohol and adult entertainment. They may also include heavy polluters, companies with questionable ethics or any that have a negative impact on the world and society.
Impact investing may not be right for everyone but, fortunately, for investors who want to be more selective about where their money goes, there are now suitable options. If you want to talk more about how you invest your money, get in touch.
