What’s the difference between ethical and impact investing?

When investors first become aware of impact investing, they often wonder if it is the same as ethical or social responsible investing (SRI). Damien Lardoux, Portfolio Manager at EQ, explains the difference and looks at how impact investing can drive social and environmental change.

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail   by Damien Lardoux, 16th June 2017

So what is the difference?

Ethical investing typically focuses on excluding controversial sectors, for example tobacco and firearms. By contrast, SRI selects companies for positive environmental, social and governance (ESG) performance relative to industry peers, irrespective of the impact of the product or services.

Impact investing, on the other hand, offers what I believe to be a more dynamic approach to investing in this rapidly growing area by going a step further. This type of investing aims to solve social and environmental challenges by selecting companies which through their products, services and business practices create a positive impact. It is this positive element and of course the financial return that attracts investors.

Identifying investments that can make an impact

With more investors thinking about how their decisions affect society. The United Nations’ Sustainable Development Goals (SDGs) provide a good road map for identifying investments that can make an impact.

The SDG’s adopted by its 193 member states in September 2015, contain specific targets to address issues like poverty, clean water, energy, gender inequality, health and education by 2030, as shown below. The opportunities for companies that can help address them are huge.

At EQ Investors, we are fully supportive of this initiative and through the EQ Positive Impact Portfolios are actively investing in companies that are working towards achieving these goals.

Two examples of companies held within the portfolios are Mibanco and Agilent Technologies. Below are details of the goals they are pursuing and the solutions they are using.

Addressing poverty in Latin America (Sustainable Development Goal 1: no poverty)

According to the Borgen Project, a US-based anti-poverty charity. One in five Latin Americans lives in chronic poverty conditions which cause premature death from hunger, malnutrition, lack of access to basic services and drugs. Poverty in Latin America encompasses both urban and rural areas, and is as high as 50% in Guatemala. Whilst the number of people in poverty has significantly decreased since 2000 – mainly thanks to the boom in commodity prices, the development of further economic opportunities will help to get more people out of poverty, particularly women who are over-represented among the poor in most countries in the region.

Solution: Financing micro-enterprises in Latin America

Mibanco, a subsidiary of Credicorp Ltd, is Latin America’s largest microfinance institution. Microfinance is recognised for its ability to stimulate self-employment through the establishment of microenterprises that reduce reliance on informal, low wage jobs, and stimulate employment opportunities.

In 2016, Mibanco had a loan book equivalent to $2.6 billion. This represented an increase of 10% from the previous year, giving 115,000 new people access to credit. Mibanco also plays an important role in local communities by financing domestic water and sewage connections as well as promoting a waste recycling program.

Detecting pesticides in our food (Sustainable Development Goal 12: responsible consumption)

Pesticides are substances intended to prevent or destroy pests and used to protect food from bacteria, weeds, mold, insects and rodents. Since the Second World War, a fast growing population combined with limited arable land pushed governments and industry to promote the usage of synthetic pesticides to increase yields. Meanwhile there is growing scientific evidence that some synthetic pesticides are harmful to humans, increasing the risk of attention deficit disorder, autism, and other health problems. Authorities around the world have yet to develop a common approach to pesticide regulation, and face intense lobbying by the chemicals industry.

As a result, with food supply chains becoming more and more global, it is increasingly difficult for the food industry to assess the level of pesticides within their products. A recent study showed that food often contains multiple pesticide residues, which makes the task of assessing overall toxicity even more difficult.

Solution: Developing technologies to improve food safety testing

Agilent Technologies is a world leading company in detecting pesticide contamination in our food. Confronted by a huge increase in the number of contaminants, the company has developed technologies used for high-throughput food safety testing that can be used across the food supply chain.

A case study in point is Amitraz, an insecticide used to protect honeybee colonies against Varroa mites. Amitraz is now illegal in the EU, but as its molecules are highly unstable this makes it difficult to detect. As a result beekeepers were still using it to protect honeybee colonies, despite the ban. However, use of Agilent’s testing equipment has now made it possible for the EU’s reference laboratories to consistently detect the pesticide in honey. As a result, the use of Amitraz in the beekeeping industry has significantly decreased.

To find out more about specific investments made by the funds within the EQ Positive Impact Portfolios, take a look at our quarterly updates.

About the author: Damien Lardoux

Damien has an MSc in Management from Reims Management School and an MSc in Wealth and Asset Management from ESCP-EAP Paris Business School. He is also a CFA charter holder, being a regular member of the CFA Institute and CFA UK society.

Before joining EQ Investors, Damien worked for Bank of America Merrill Lynch being responsible for asset allocation, security selection and portfolio construction. Damien now acts as the portfolio manager for the EQ Investors Balanced, Positive Impact and Multi Index portfolios. He also co-chairs our Fund Selection Committee.

Damien is a devoted sportsman, playing judo and squash on a regular basis. He also enjoys hiking, to very far places such as the Himalayas and Kilimanjaro.

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