Five steps to strengthen impact investing
It’s startling to consider that in a country as prosperous as the UK, 2.3 million children are living in poverty. Or that in a country which prides itself on its sporting success, 1 in 4 adults are obese.
We all know that there are huge social, economic and environmental challenges facing the world. The recent global financial crisis not only resulted in deficit-ridden governments but a deepening of social inequality. And while budgets are getting tighter, these problems aren’t going anywhere. That’s why it’s more important than ever to think laterally and find ways to fund solutions to these urgent challenges.
When I began my career, the concept of an investment approach which not only delivers an attractive return but also a positive contribution to society was in its infancy. Impact investing has certainly come a long way in the intervening ten years.
According to the Global Impact Investing Network (GIIN), $60 billion went into impact investing worldwide in 2015, and JPMorgan are forecasting that impact investing could reach $1 trillion by 2020.
Whilst impact investing is certainly heading in the right direction, there is still much to be done. Here are five steps to strengthen the sector and accelerate the rate of growth/
1. Collaboration is crucial
Undoubtedly the greatest barrier at the moment is a lack of awareness amongst private investors. In my discussions with clients, colleague or relatives, I’m always amazed by their interest in getting involved once they understand the social and environmental problems impact investing is trying to tackle.
The GIIN has worked tirelessly to raise the profile of impact investing. It’s going to take all stakeholders (experts, social impact businesses, government bodies and investors) working together to ensure impact investing reaches its full potential.
2. A more flexible regulatory framework
Further support from UK regulators would be welcome. Currently, fund managers investing in listed mid and large size companies are discouraged from investing in smaller companies due to concerns about converting these investments into cash at short notice. Yet retail investors can invest in highly illiquid commercial property funds.
France is a country that has already built a framework to allow those investments. Pension funds called “Fonds Solidaires” were launched in 2001, with a mandate to invest between 5% and 10% in unlisted, high impact companies. Since their launch, they have proven to be very popular with assets under management surpassing €6 billion.
3. Overcoming the measurement challenge
Critical to unlocking the full potential of impact investing and translating growing into significant customer flows is highlighting the value created and for whom. The current measurement tools are ideal for relatively simple businesses but less adequate for large or diversified companies. As a result, a number of participants in impact investing believe that equities and bonds traded on stock exchanges should remain outside the scope due to difficulty in measuring the impact.
I believe that a huge effort should be put into developing these frameworks for publicly traded stocks and bonds. Their market size and availability can really give impact investing the boost it’s been waiting for by unlocking capital at scale.
4. Further support from asset managers
Although we have seen high profile asset managers like BlackRock and Goldman Sachs embrace the sector, the investment options (particularly for private investors) remain limited.
A recent survey indicated that 62% of UK investors would like to support companies which are both profitable and make a positive contribution to society and the environment. Unfortunately, too often, managers restrict themselves to negative or ESG (Environmental, Social and Governance) screening, missing the ‘positive’ element that sparks most investors’ interest.
The Paris Climate Accord was an acknowledgment by 190 countries that climate change is not a political or economic issue. Whilst politicians and presidential administrations will come and go, real investment leadership is more important now than ever.
Even though politicians are only beginning to publically acknowledge this existential threat, some forward-thinking companies have already begun to implement meaningful change. These are types of companies that we look to invest in within the EQ Positive Impact Portfolios. We would love to see more of them.
Looking forward, there is a real opportunity to create a more integrated view of finance where people see that aligning their money with their values not only makes sense, but that it is critical to building the kind of world we want to live in. I have no doubt that in time all investment decisions will factor in their social and environmental impact. With a few tweaks, the fast lane beckons.
Damien Lardoux, Portfolio Manager
» If you have any questions about the above, please do not hesitate to contact us.
This article appeared in Pioneers Post on 24 February 2017.