Seeking Maximum Ethical Impact

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Oct 2017
Global, October, 11 2017 - The 21st century appears to have delivered a perfect storm of economic uncertainty, social upheaval and environmental change. Many people are questioning whether the traditional approach to investment, which has advocated the accumulation of wealth at almost any cost, is too one dimensional. Can such a singled-minded objective really insulate anyone from the huge challenges we are all facing?

Impact investing provides a new way of tackling the world’s most pressing issues while still providing an attractive financial return. It also enables investors to place their money according to their values without having to forgo financial opportunities.

In recent years, this approach has become much more prevalent as people consider what the world will look like in the future. It can be an appealing investment approach for anyone who is worried about how their money is used. Indeed, a recent study conducted by Morgan Stanley showed that 71 per cent of individual investors are interested in sustainable investing.

Key points
•Impact investing provides a way of tackling pressing issues while still providing an attractive financial return.
•A study showed that 71 per cent of investors are interested in sustainable investing; it particularly appeals to women and millennials.
•Using model portfolios makes impact investment accessible to  more people than in the past.

However, because impact investing is not (yet) broadly embraced, investors can find it challenging to get started. While some advisers are strong advocates for impact investing and very knowledgeable, there are others who are uncertain how to help clients who express an interest.

Tipping point

With demand for impact investing being driven from the bottom up, the development of tailored solutions for investors will be of vital importance. In the past the cost of a bespoke screening service has placed impact investing beyond the scope of most investors, but using model portfolios makes impact investment accessible to many more people.

The best companies have always been the ones that innovate, find new ways to serve real needs and solve real problems.

A positive impact approach could seek out companies making a positive approach to society or the environment (positive screening), while avoiding companies that are obviously harmful (negative screening).

Positive screening examples 
•Clean fuels
•Renewable energy
•Healthcare
•Recycling
•Sustainable agriculture

 Negative screening examples
•Armaments
•Gambling
•Ozone depleting chemicals
•Testing cosmetics on animals
•Pornography

Analysis can also take into account environmental, social and governance (ESG) matters relevant to a company’s strategy and operations.

More major mainstream investment managers are coming to impact investments and we have seen a corresponding increase in the number of new fund launches over the past few months. The increasing popularity of our own positive impact portfolios is testament to the growing interest in the sector.

Events such as the annual Good Money Week, which runs from 8 to 14 October, are growing in popularity. They bring together individuals, financial advisers, charities and financial institutions to raise awareness of sustainable, responsible and ethical finance.

Increased coverage in the media and the launch of the UK’s Good Egg kitemark – a first for financial companies that are making a positive impact – show we are at an inflexion point for this approach.

Opportunity

Integrating impact solutions into investment propositions presents a fantastic opportunity for financial advisers. This is not just about differentiation – it is about opening up a new and more understandable dimension to investing for clients.

Helping solve the serious social and environmental challenges of today not only feels good, it also makes a great story. Clients with a positive story to tell are far more likely to recommend their advisers’ services to friends and family.

It also helps with reaching new investors. According to a recent Bank of America survey, women are more inclined to be interested in impact investing – 70 per cent versus 30 per cent.

With women’s wealth growing faster than men’s, they are forecast to control the majority of wealth in coming years.

This is reflected in the EQ Positive Impact Portfolios, with 60 per cent of new investors within the past 12 months being female.

Morgan Stanley’s research also shows that millennials are more likely to look at the impact of their investments than other investors.

Young people might not look like the ideal clients as they struggle with student debt and high housing costs, but over the next 40 years they are set to inherit $59trn (£45trn).

The investors of the future will demand a different way to doing business. 

Overcoming preconceptions

The rapid growth of impact investing has been countered by concerns about simultaneously achieving social impact and market-rate returns.

A benchmark study published by Cambridge Associates found that impact investing can capitalise on long-term social or environmental trends to compete with, and at times outperform, traditional asset class strategies.

Indeed, the positive impact approach itself favours companies that are trying to do good and run their businesses in a sustainable manner. Such companies avoid fines and other penalties; they have stronger relationships with their customers, suppliers and employees. Furthermore, they tend to operate in emerging sectors with high-growth potential.

Future prospects

The future for impact investing looks promising. According to the Global Impact Investing Network, the market had an estimated worth of $60bn worldwide in 2014, and is expected to jump to between $400bn and $1trn over the next three years. A growing market means there will more opportunities for people who want to get involved.

Today there is a chance to create a more integrated view of finance where people see that aligning their money with their values not only makes sense, but that it is critical to building the kind of world we want to live in.



 

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