Approaches to Impact Investing

30 May 2018

Impact investing aims to have a positive social or environmental impact and to generate positive returns for investors. We explore some examples of how funds adopt an impact approach.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What the main approaches to impact investing are.
  • How fund managers apply these approaches to their investment decisions.
  • Examples of investments that have been selected with different impact approaches.

If you’re considering making an impact investment, you might wonder exactly how your capital will be used to target pressing social and environmental issues.

Impact investing is a way investors can seek to protect and grow their assets, whilst making a positive contribution to our world over the long-term.

But how does impact investing work in practice, and how might you go about selecting an investment or a specific fund to invest in? Here, we explain how some fund managers are using impact in their investment decisions.

Different approaches to impact investing

Importantly, there is no single method of impact investing. However, we have identified three main approaches.

  1. How companies operate

    Here, investors look at environmental, social and governance (ESG) factors alongside traditional investment considerations to decide which investments to make. Including these factors can help an investor make a more informed judgement about where a company may be at risk or could have an advantage relative to its peers.

  2. Social and/or environmental trends

    Certain sectors and industries will benefit from riding mega-trends like climate change or aging populations. For example, these may include companies in the sustainable agriculture sectors, or companies providing healthcare services for ageing populations in developed countries. Effective investors will still consider how individual companies operate, especially when deciding between companies within a sector; but the starting point is finding the sectors and industries benefiting from or driving wider societal trends.

  3. Specific societal issues

    Here, the investor is interested in a particular societal challenge and investing in organisations trying to address that issue. For example, these may include companies developing treatments for rare, or “orphan”, diseases, or companies providing solutions to reduce water usage for industries or consumers.

Example of a fund investing in social and environmental trends

Henderson Global Care Growth Fund

This fund seeks to invest in companies that support the development of a sustainable global economy, with a focus on climate change, natural resources, population growth and ageing demographics. As such, we see them applying the second impact approach of focusing on social and environmental trends.

For example, Panasonic is a core fund holding. As a large, well-known brand producing durable goods, it may not immediately seem like an “impact” company.

However, the manager is looking for companies whose products and practices are considered to enhance the environment and life of the community. Panasonic has established an ‘eco-solutions’ company, part of which develops and manufactures sustainable products, such as solar panel systems. Meanwhile, it has implemented energy-saving measures in all its factories. Based on these considerations, Panasonic may be considered as a company taking positive steps to combat climate change.

Example of a fund investing for specific societal issues

The Columbia Threadneedle UK Social Bond

This fund focuses on investing in bonds of organisations that create social benefit and underpin economic development and job creation in the UK across eight areas, including education and employment and training.

As a result, the fund has invested into bonds from UK universities. For example, one bond issued by Cardiff University is helping to fund an innovation campus, and another from the University of Manchester is helping the development of a new cancer research facility. It has also invested in bonds for social housing, such as the Golden Lane Housing bond which purchases, manages and maintains properties for people with learning disabilities.

To help maintain a clear focus of achieving and supporting positive outcomes for individuals, communities or society as a whole, the fund was launched in partnership with Big Issue Invest, the social investment arm of The Big Issue Group, which provides advice on the social impact methodology.

Different approaches, one aim

These examples are designed to show how investors are moving from the concept of impact investing to practical application in their investment approaches and choices. Whilst the approaches differ, they share the aim of generating positive outcomes alongside long-term financial returns.

Please note that our mentioning these particular funds should not be considered a recommendation, and bear in mind that the specific holdings in a fund can change at any time. If you’re unsure where to invest, seek professional financial advice. Like all investments, these can fall in value as well as rise; you may get back less than you invest.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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