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Impact investing in stocks and bonds

23 January 2018

It is possible to invest intentionally to protect and grow your assets and to make a positive contribution to our world. We explain how.

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:

  • Why all companies generate impact through how they operate and the goods and services they provide.
  • How to assess a company’s operations.
  • How to invest your portfolio for impact.

If you’re an investor, the hope is that your investments will grow in value, and you may also care about what impact your investments make in the world. But how can you be sure that what you invest in supports both your core values and your portfolio’s need for strong performance?

To help work out whether an investment aligns with your values, it’s a good idea to ask the following two questions:

  1. How does the company operate?
  2. What goods and services does the company provide?

How can you assess a company’s operations?

Nearly 2,000 global investment managers, which look after $68 trillion of assets, have signed up to the United Nation’s ‘Principles for Responsible Investing’. These set out three general categories to assess investments: environments, social and governance (ESG).

By considering ESG, it makes it easier to identify when a company could be at risk, or when it might have an advantage over its peers. For example, organisational practices and culture can affect a company’s licence to operate, or make a company more or less prone to scandals or fines.

Ratings agencies, which range from specialists such as Sustainalytics and Trucost to the more mainstream MSCI or FTSE Russell, are collecting and reporting ESFG as a way of rating companies. Investors can now better understand the consequences of a company’s operation, for example, such as the amount of CO2 generated) and how they compare to competitors.

However, assessing a company’s impact is more than simply looking at its ESG criteria - it’s also important to look at what that company produces.

How do goods and services create impact?

While many investors commonly avoid businesses whose products harm people or the environment, considering a company’s impact can make a big difference in understanding its future potential.

For example, companies may seek to benefit from demographic trends that generate demand for new products, such as ageing populations seeking health lifestyles. Others may take on bigger global challenges, such as climate change. For example, American multinational conglomerate General Electric (GE) 12 years ago launched its green initiative called Ecomagination, which is dedicated to delivering cleaner and more efficient technologies such as lower emission aircraft engines and water purification technologies.

Even some companies whose produces have a negative impact can move to more sustainable products. For example, many oil producers now also invest in renewables. Anglo Dutch firm Shell’s new energies unit plans to spend $1bn a year on biofuels, hydrogen and renewables by 2020, up from the $200m it spent last year, whilst the gas and renewable power division of France’s Total accounted for $4.7bn of capital expenditure in 2016.1

Investors may therefore want to seek companies that look at both the negative and the positive outcomes of their products, whilst remembering to assess how well-run these businesses are. Portfolios which are invested for impact will hold stocks and bonds in:

  • Companies with strong governance, risk management culture and sustainable practices as identified through ESG data
  • Companies whose businesses address social and/or environmental challenges and trends identified through the revenue generated by their goods and services.

There are also funds which specialise in selecting companies for impact, and aim to both protect and grow your assets and to make a positive contribution to the world.

All companies generate an impact both from the goods and services they provide and how they operate. If more people begin to consider impact investing for their portfolio, companies may adapt to incorporate better social or environmental outcomes when they realise investors avoid or select their investments based in part on their impact. Please bear in mind that no matter what stance you take towards the impact of your investments, they can still fall in value and you may get back less than you invest. Barclays Smart Investor doesn’t offer personal investment advice; if you’re unsure, seek independent advice.

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