Aligning positive change with investment returns

This week, Associate Investment Analyst Nick Harrington discusses the options we have for investing for positive change, and how we can align our investments with social and environmental causes – as well as securing returns.

The state of the world

The world is changing before our eyes, and the watchwords of this new era cover concepts such as the circular economy, energy transition, and sustainable development. Foremost in people’s minds are notions such as community, renewable energies, environmental awareness and trust. And the business landscape is peppered with terms like accountability, transparency and sustainability.

One theme that we frequently revisit in our Strategic Insights articles is the state of the world we live in. This period at the start of the 21st century may well be seen as a watershed moment. For the first time, there is widespread awareness of the damage our established practices and processes are doing to the environment. For the first time, we understand that this may be our last opportunity to address it.

Credit: C3S/ECMWF.

It is generally acknowledged that we need to find ways of marrying up human development goals while simultaneously sustaining our planet’s ability to provide the natural resources and ecosystem services on which the economy depends. We need to find ways of meeting our present needs, but without compromising the ability of future generations to meet theirs. That’s basically what sustainable development is all about.

Sustainable development

The modern concept of sustainable development is derived mostly from the 1987 Brundtland Report. And a number of key global agreements and international bodies – such as the Paris Agreement, Agenda 2030, the Kyoto Protocol and the Intergovernmental Panel on Climate Change – have emerged from it, all designed to bring about change: change that is positive and based on sustainability.

But we don’t need to be Elon Musk or David Attenborough… or even Jamie Oliver or Marcus Rashford to drive change. As investors, we have considerable leverage when it comes to making the world a better place.

Impact investing

We can invest in positive change. Positive investing – or impact investing – involves aligning our investments with social and environmental causes. It means investing in companies, organisations and funds in such a way as to generate a measurable, beneficial social or environmental impact… alongside a financial return.

Now, it’s important to point out at this juncture that Investment Quorum does not have what might be specifically termed an “impact investing strategy” as such. Our investment team is relentlessly focused on unearthing exciting investment opportunities that will generate decent returns, but as a B Corp-certified wealth management firm with a social conscience, we find ourselves increasingly interested in funds that also contribute to an inclusive and more sustainable world: ideal for investors wishing to integrate environmental, social and governance concerns into their portfolios.

We all want decent returns – that’s a given. But investing for positive change is about analysing and reporting impact, and providing the capital needed to address social and environmental issues.

Returns… but not just returns

Our investment team identifies the social and environmental goals we want clients’ investments to support and then looks for funds that attach importance to themes such as social inclusion and education, the environment and natural resources, healthcare and quality-of-life, and that address the needs of the world’s poorest populations – the people on the bottom rung of the global wealth ladder.

To measure positive impact, you need processes and systems that can be applied uniformly across a plethora of different companies. However, not all positive change is easy to quantify. Useful data is not uniformly available, and it might not be straightforward to put a figure on improving access to information; that said, doing so is just as important as calculating the carbon emissions resulting from an industrial process or its energy efficiency.

People who embrace impact investing are committed to creating real change, and being able to demonstrate that such change is actually achievable is key to getting even more people to invest positively. That might involve managing the perception of risk in emerging or innovative sectors and encouraging people to commit capital to projects that have uncertain financial returns or unproven impact outcomes.

The positive change funds that IQ looks at aim to outperform various world indices… while at the same time contributing towards a more sustainable and inclusive world. The investment analysts working for such funds are usually bang on the money when it comes to singling out the Amazons and Teslas of the future. It’s their job to identify tomorrow's success stories, and doing so requires a long-term focus: achieving the desired outcomes can take months or even years, which might clash with the shorter-term expectations of some investors.

Due diligence plays a key part in our processes, along with both positive and negative screening – on our part and on the part of the funds that we buy. The Troy Trojan Ethical Global Income Equity Fund, for example, screens out sub-sectors that are deemed more harmful to the planet and society more widely. The Jupiter Ecology Equity Fund, meanwhile, seeks to invest in companies committed to solving environmental challenges (such as climate change and natural capital depletion). Baillie Gifford’s Positive Change Fund aims to invest in companies whose products and/or services contribute to impact themes addressing critical social and/or environmental challenges.

Such funds are made up of businesses that have the potential to double over the next five to ten years, with significant opportunities thereafter. The companies within them are assessed on the basis of their products, their business practices and their determination to bring about positive change.

Measuring positive impact

IQ and the managers of the funds in which we invest have put in place an array of processes, platforms and ratings systems for gauging the impact of such companies annually. They feature analyses of the resources they use, their activities and outputs, as well as the short-term and longer-term impacts that they have on society. Many of them extensively use the UN’s Sustainable Department Goals as a common framework, or the Global Reporting Initiative.

The Baillie Gifford Positive Change fund has holdings in San Diego-based healthcare company DexCom, which has revolutionised life for diabetics by developing continuous monitoring solutions. Over a series of patented innovations, it has demonstrated its deeply rooted commitment to creating positive change. Its continuing research and development, together with its efforts to make its products more widely accessible prove that its commitment goes well beyond its mission statement: it really is serious about changing the world.

Source: Tesla. Wired.

With its charismatic and somewhat unpredictable CEO, Tesla may be something of a “Marmite” company (it has a tendency to polarise people), but if it is in the fund, it is because it is not just committed to making greener cars: it invests to make them cheaper, undertakes research into electricity storage technologies and has opened up its patents to serve the wider industry. Meanwhile, Alphabet may have poorly regarded business practices, but as a powerful equalising force on the Internet, it includes in its purpose statement a commitment to improve the lives of millions of people.

We have been a B Corp company for a year

At IQ, we do not shy away from putting our money where our conviction lies. In addition to managing your wealth through impact investing, we support laudable and worthwhile causes where we can – in line with our belief that businesses such as ours should be responsible and contribute in a meaningful way to the communities in which they operate. Indeed, the B Corp certification we were awarded one year ago recognises our social and environmental performance.

We believe that investing – beyond safeguarding our clients’ futures – should give them a sense of making a difference. We also believe that given the generous government stimulus packages available in many developed countries for companies spearheading the energy transition, it is just about possible to put together a portfolio that can withstand economic volatility AND surpass various environmental and social targets (many of which are enshrined in law).

We want to do more than just help people invest: we want to help them channel capital in a responsible way towards companies that are going to innovate and address global challenges with a view to creating a more sustainable world. That is what impact investing – investing for positive change – is all about.

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