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Considering impact investing in listed markets

23 March 2018

3 minute read

Making sure what you invest in matches your values and need for performance.

If you’re like most investors, your investment portfolio is a diversified mix of publically-listed company stocks and bonds. While you want your investment to grow in value, you may also care about what impact it makes 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?

Even though a company may be highly rated as an investment, what it produces could ultimately be harmful to people, communities or the environment. To help you better assess whether a sound investment sits right with your values, we suggest asking two key questions

  • How does the company operate?
  • What goods and services does the company provide?

How can we assess a company’s operations?

Close to 2,000 global investment institutions, managing over $68 trillion of assets, are now signatories to the UN’s Principles for Responsible Investing, which set out to incorporate in their analysis of investments how companies operate, along with the analysis of fundamentals. This type of analysis focuses specifically on three factors: environmental, social, and governance (ESG).

By considering ESG, we can better identify when a company is at risk or has an advantage over its peers, allowing you to make better investment decisions. For example, organisational practices and culture can affect a licence to operate (see the sanctioning of Uber in London), or make a company more or less prone to scandals or fines.

Ratings agencies, from specialists Sustainalytics and Trucost to the more mainstream MSCI or FTSE Russell, are collecting and reporting ESG as a way of rating companies. Investors can now better understand the consequences of a company’s operation and the impacts they generate in either, absolute terms (such as the amount of CO2 generated), or in comparison to their competitors (e.g. gender diversity relative to their peer group). However, assessing a company’s impact is more than simply attending to its ESG criteria – we also have 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. One company may seek to benefit from societal trends that generate demand for new products – such as ageing populations seeking healthy lifestyles – while another may aim for larger challenges, such as climate change, by providing profitable innovative solutions (see GE’s Ecomagination initiative).

Even some companies whose products have a negative impact can move to more sustainable products (many oil producers now invest in renewables). Although we recognise the potential value in tackling urgent societal challenges, most companies’ goods and services cannot achieve their loftier goals alone.

We encourage investors instead to seek companies that look at both the negative and the positive outcomes of their products. And importantly, you still need to assess how well-run these businesses are.

Investment conclusion

Impact investing aims to protect and grow your assets and to make a positive contribution to our world. To achieve this, you’d do best to invest through funds that specialise in selecting companies for impact.

All companies generate an impact both from the goods/services they provide and how they operate. As more people consider impact investing for their portfolio, companies will adapt to incorporate better outcomes when they realise investors avoid or select their investments based in part on their impact.

Investments selected for impact can fall and rise in value like any others. You may get back less than you invest.

Key points

  • All companies generate impact through how they operate and the goods and services they provide
  • While ESG focuses primarily on how a company operates, ‘impact’ includes how a company operates and what that company produces
  • You can invest intentionally to protect and grow your assets and to make a positive contribution to our world

Speak to your Wealth Manager to learn more about our investment products and services.

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