Can your investments help to build a better tomorrow?
Sustainable investing is an expanding area which is becoming increasingly popular with many investors. Here, we consider what impact investing is, dispel a few common myths, and discuss sustainable investing products.
It's no secret that the human race faces challenges, and that more can be done to tackle the issues confronting us. From global warming to our rapidly expanding population, humanity has work to do to create solutions to many complex problems as we move further into the 21st century.
Over the last few decades more and more people have come to the realisation that it is not just down to philanthropy or government policy to fix societal ills; the private sector has a crucial role in tackling some of the problems that humanity, and the planet we inhabit, faces. In practice, many believe this should involve investing in companies which have the potential to change our world for the better by effecting social or environmental change.
Impact investing: a new path down a well-trodden route
The concept of responsible investing has been around for centuries, but the driving philosophy behind this practice hasn’t changed much throughout its many iterations. Supporters of responsible investing believe that making capital more accessible to responsible companies supports their development, and may drive sustainable business practices.
The first form of sustainable investing was negative screening. This is where companies are excluded for not complying with social or environmental criteria, based on the individual’s or institution’s principles. Many investment managers use this technique, often prohibiting investment in companies which are part of the tobacco industry or are involved in arms production. Another method is ESG (Environmental, Social and Governance) integration, which involves incorporating ESG criteria into the analysis of investments.
What sets impact investing apart from other forms of sustainable investing is the selection of companies based on the measurable positive impact they have on the world, as well as their potential to produce financial return. But how do you know which companies to invest in, and how can retail investors access these companies?
How you can invest sustainably
An increasing number of products are being launched so that retail investors can have a greater impact with their investments, and make a difference with their money. This supply is being met by rising demand and enthusiasm for these products – a recent UK survey found that over 70% of people want their investments to benefit people and the planet1. Growing awareness and accessibility of these products led to investors pouring €120 billion into sustainable investment products in 20192.
Managers of impact investing funds select companies which meet their criteria, and will report on the impact generated by the underlying investments as well as the performance of the fund. You can access many sustainable funds through Barclays Wealth.
Capital growth, not charitable giving
There is a common misconception that investing sustainably means sacrificing financial returns. However, some studies have shown that this is not the case. Research by the London Business School found that companies which make material efforts to transform their business practices had higher share returns than their peers who didn’t in the form of an extra 4.8% return per year over 18 years3. However, this is just one piece of research. It is important to remember that the evidence isn’t yet clear whether ESG investing produces better returns than non-ESG investing.
Furthermore, this is research that tells us about the past performance of these investments and this is not a reliable basis for predicting their future performance. In any event, whether these strategies do perform better isn’t necessarily why many investors are interested in them. It can be difficult for a retail investor to differentiate which companies actually adopt responsible business practices and which ones are just “making the right noises” for good press; a practice known as “greenwashing”. But again, this is where active managers will be able to see the wood from the trees, and can pick companies that have genuinely integrated ESG policies into their way of doing business.
Many of these companies may well be poised for success. A business which evaluates the long-term needs of the world at large and has a strong governance culture will often have the potential for sustainable earnings growth – and is more likely to stay on the right side of their regulators.
Another barrier to overcome with impact investing is a public perception that sustainable investing just involves companies making windfarms and solar panels – but the truth is that the investment universe is so much bigger. Healthcare, sustainable transport, education and technology are all areas that contribute to the wellbeing of our society, so companies involved in these sectors will be found in many impact investing funds.
Who are they and how are they doing it?
One example of a sustainable investment fund is the Janus Henderson Global Sustainable Equity Fund. This fund looks to support the development of a sustainable global economy, while pursuing strong financial performance for investors. They famously ask a key question while deciding whether to invest in a business; “is the world a better place because of this company?” As part of this process, they identified four societal ‘megatrends’ which humanity will have to adapt to; population growth, ageing populations, resource constraints, and climate change. The fund invests in businesses where at least 50% of revenue comes from the sustainable development of solutions for these issues. This fund has also demonstrated strong and consistent financial performance, with annualised returns of 15% over the last five years.
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Past performance of investments is not a reliable indicator of their future performance.
Funds are designed for the long term, so you should only consider them if you can stay invested for at least five years.
These are our current opinions but the future, as ever, is uncertain and outcomes may differ.
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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