Impact Investing past, present and future
Where has this trend been and where might it be going?
Concern about the outlook for the world’s fragile environment is starting to be reflected in growing investor appetite for investment strategies that can help.
Environmental, social and corporate governance (ESG) investing has enjoyed a fascinating journey over the decades. It has arrived at its latest iteration, named ‘Impact Investing’, only very recently. So what has this evolution looked like and where might it go next?
A very neat way of encapsulating this changing landscape is in figure 1. We can place the investment funds universe today onto this continuum. The majority of funds are traditional and sit in the far left box outside the ESG space. They invest in equities and/or bonds purely for financial gain. Moving rightwards we then step into the ESG space.
The first step is to responsible funds that simply exclude sectors and stocks that may cause harm to the planet or society. Obvious examples include tobacco stocks or cluster munitions stocks. Next to the right come sustainable funds. These not only screen out the so-called ‘sin stocks’ of tobacco and weapons, but actively engage with the management teams of the companies they hold to enhance value and the well-being of society and the planet.
The central three segments really bring us to the core of Impact Investing. Funds in this space not only avoid the stocks mentioned before, but also engage with companies and seek to invest in firms whose activities are having clear and specific societal and environmental benefits. The extent to which the risk to financial returns matters varies as you move to the right.
Figure 1: The spectrum of capital
At Barclays, we offer our Multi-Impact Growth Fund which sits in the left-most of the three Impact categories. It invests in listed equity and bond funds that have a positive impact whilst also aiming to deliver a compelling return. In fact, more than two years after launch, its financial gains have beaten those of the average peer though it’s important to appreciate that past performance of any investment is not a guide to its future performance.
This investment takes a moderate level of risk to provide long-term growth. There’s more exposure to riskier investments than Barclays’ lower risk profile funds, but it’s still well diversified to try to mitigate some of that risk. At this level, short-term changes in value are more likely and while you’ll be invested in both bonds and shares, it’ll lean more towards the latter. This investment, like all others, can fall in value as well as rise, so you can get back less than you invested.
The final two buckets of the spectrum are not covered by investment funds as they are philanthropic. Barclays has a service that can assist with these considerations too.
While not explicit here, one could overlay this spectrum on a timeline in the UK, starting from the left, with the Friends Provident Stewardship Fund launched back in 1984. Prior to that, all funds sat in the Traditional box. Since then, interest in ESG investing has ebbed and flowed over the intervening three decades. In the 2000s, responsible and sustainable funds launched and gathered attention and assets. Yet, with the advent of Impact funds in the mid-2010s, the focus on ESG investing has certainly reached new heights. The interest and weight of money has never been greater.
This is due to a variety of factors not least societal change. Young people especially have an increasing interest in the environment, and one highly effective way to prompt change for the better for the planet and society is to integrate it into investing and how investors interact with company management. By engaging with firms and, in the case of equity holders, voting appropriately, investors can have a huge positive impact without giving up financial gains.
So what about the future of this space? Very soon, engaging and voting will be the minimum across all investment funds, while the amount of money in Impact Investing vehicles will continue to rise rapidly. Not only is this due to investor demands and the awakening of companies to these issues, but also the regulatory imperative, whether it’s things such as the UNPRI (United Nations-supported Principles for Responsible Investment), the updated UK Stewardship Code or the SRD II (Shareholder Rights Directive).
As Peter Harrison, CEO of Europe’s largest listed asset manager, Schroders, expressed in November:
"Twenty years from now we will have a much bigger discussion about the impact you have in delivering returns, what is the impact on society and climate. In my mind, our industry has been given this really deliberate purpose, which is what can you do to solve wider problems whilst also investing."Peter Harrison, CEO, Schroders
Things to consider
The value of investments can fall as well as rise. You may get back less than what you originally invested.
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