How can you make your investments have a positive impact?

What you’ll learn:

• What does impact investing actually mean?
• What are some of the challenges and issues with impact investing?
• How do companies have a positive impact?

We, at Barclays, define impact investing as investments made into companies and funds with the intention of generating a measurable benefit to society or the environment. There has been a growing focus on environmental issues from all sectors of society and the investment profession. The challenges faced so far this year have only served to accelerate some of these trends as countries grapple with the pandemic and notice the benefits of quieter roads and cleaner air. In addition, investors and society at large are rightly increasingly focusing in on wellbeing and workplace diversity. This is a broad and developing area so we should not draw any concrete conclusions about expected returns as a whole. However, there is growing evidence that the risk-adjusted returns from sustainable investment strategies do as well as or outperform traditional strategies. Here, we focus on identifying positive impact rather than just simply financial returns.

With this is mind, it is worth highlighting some of the key aspects of this field of investing that will help identify what you should look out for when considering an investment aimed at generating a positive impact.

The first area we will cover is the UN Sustainable Development Goals (SDG). These are the 17 areas viewed as crucial to delivering a more sustainable future. The goals cover areas such as health, well-being, education, energy efficiency, clean energy, and clean water. Increasingly companies are aligning their business – through their actions, products, and services – to tackle these goals. Aligning to, and tackling, these goals should be viewed as a key means of measuring the tangible benefits generated by an investment. 

Investing for impact and tackling these goals can be done in a number of different ways. This is where a variety of different terms are likely to be thrown at you. Here, we cover three very broad areas to consider. It’s important to note that these are not mutually exclusive.

The first area is ESG which stands for Environmental, Social and Governance. Environmental considerations could cover carbon emissions, energy efficiency, recycling, and resource utilisation. Social factors would include aspects such as diversity, employee safety, and human rights. Governance would cover areas such as corporate governance, corruption, compensation disclosure, and board diversity.

A second area is thematic investing often focusing on areas with pressing challenges around sustainability whether it be ageing populations, increased urbanisation, resource scarcity, and climate change.

The final area to consider is catalytic investing where a company’s product or service looks to deliver a specific outcome based on addressing challenges. You can see how here there would be some overlap with investments tackling sustainability challenges.

Challenges and issues with Impact Investing

Increased interest and focus has seen assets managed by these funds grow significantly over the last few years. This has been accompanied by a rise in new funds being launched to meet this demand. With that comes challenges. It is widely recognised that the lack of a single set of standards by which investors can assess the true impact of a fund or investment makes it difficult to compare investments and truly assess impact. It has also led to window dressing. This is often referred to as ‘greenwashing’ or ‘social washing’ where a fund uses terms linked to this type of investing without there being much, if any, tangible output in terms of the underlying investments generating a positive impact.

How do companies have a positive impact?

Companies can have a positive impact in a significant number of different ways. The pandemic has only served to increase focus on these positive areas and the benefits they can generate. To give just a couple of simple catalytic examples, they could be involved in designing new medical operations that improve people’s quality of life or in methods for purifying water in regions of the planet where clean water is scarce. We have been managing these types of impact strategies for a number of years. Our due diligence and conversations with managers have produced some really interesting companies and examples of positive impact in practice. 

Firstly, the Danish firm Orsted has targeted the seventh SDG through the growth of the global offshore wind industry, which is now vital to the efforts to curb global climate change. Aside from technological leadership, it has done this by driving down costs of offshore wind energy so that it becomes globally competitive. In turn, the company has benefited by being an early-mover, developing stakeholder insights and highly valuable partnerships with national energy champions which positions the company well to benefit from the global expansion that is now happening.

Shares are a more familiar path for investors to find examples of investments with a positive impact. What about the bond markets where investments are less well understood? The Co-op is a UK supermarket and its sustainable bond was the first to be issued by a UK retailer which aims to meet the United Nations’ Sustainable Development Goals. Proceeds are used to distribute Fairtrade produce and develop new products, help Fairtrade producers and their communities, and boost marketing. Proceeds from the bond are also pledged to fund ‘Beyond Fairtrade’ projects with Co-op Fairtrade producers, communities and supply chains, aiming to provide farmer training and advice. Ultimately, this targets the fourth SDG and the eighth SDG through ensuring that producers in developing countries are paid a fair wage and they and their families have a better livelihood. Just like shares, bonds can fall as well as rise in value. In the case of ESG bonds just as with any other bonds, repayment of the investment at the end of the bond’s term will depend on the issuer’s financial strength and ability to pay.

Another key area of the bond market has been the issuance of green bonds. Institutions such as the Nordic Investment Bank and the International Finance Corporation have issued green bonds where funds are ring-fenced for specific projects in areas such as water treatment and hydroelectric power. The International Finance Corporation has funded over 200 projects with the effect of reduced carbon emissions equivalent to taking four million cars off the road.

The issuance of social bonds has significantly increased this year with bonds being issued to fund hospitals and crisis responses by governments. The issue here is around reporting standards not being the same as for the likes of green bonds. This again raises issues around social washing.

Conclusion

There are significant challenges for investors looking to identify means of investing for positive impact. The examples provided here shed some light on how companies and investments can generate positive impact. You can see how these areas also present potentially interesting opportunities from an investment point of view as well. The likelihood is that any investment will include a combination of different approaches where some investments fall into several categories. As with any investment, due diligence is key. This is especially the case when you are not solely looking to generate a financial return but seeking to have positive impact too.

Where to invest

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – there’s a mix of investment focus and investment approaches to choose from. The list includes a selection of funds with an ESG focus, so why not take a look at our selection?

Within the Funds List, you may like to consider the BlackRock BGF Sustainable Energy Fund which aims to invest in companies that are engaged in alternative energy and energy technologies. Or, the Jupiter Ecology Fund which focuses on companies around the world which demonstrate a positive commitment to the long-term protection of the environment.

For a wider choice take a look at our ESG & Impact Investing hub which has a large number of funds and ETFs from across the full Smart Investor products range.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

All of these investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Find out more about our Ready-made Investments.