Features

Bridging the Impact Gap

April 8, 2021

Impact investing is considered the summit of ESG approaches. We look at the evolving impact landscape within private equity and ask the experts where the ‘good’ money is going

Dedicated, standalone impact funds still represent a small minority of total private equity investors. Moving forward the open questions are firstly, how to effectively measure social returns; and secondly, is it possible to achieve returns without any trade-offs?

There are notable standards of social measurement in development, such as the IRIS system by Global Impact Investors Network (GIIN), but on the returns question, track records in the buy-out arena are still being built and therefore firm conclusions are yet to be drawn.

Still, more and more firms have started to add impact to their overall portfolio. As a result, investors are able to have a direct influence on company decisions by working to align activities with their impact goals, as well as contributing their own operational expertise to help a business succeed.

It’s a move that looks to address the seeming disconnect between investment interest and investment action because more than half (56%) of the UK population want to move in to impact investing, but only 9% have done so. This is according to government research[1] into why the country is failing to fulfil its potential as a force for financial good.


Under the bonnet

Impact investing is a sub-set of the responsible investment stable, but it is a distinct discipline of its own and aims to proactively change social and environmental behaviour through investment. The GIIN defines impact investing as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.’

UK regulation is driving impact investing up the agenda and more institutions are expected to, at the very least, have a formal policy on this area. The issue may be in reassuring investors that impact investing can enhance rather than sacrifice returns but they can look to the GIIN’s 2019 Impact Investor survey for support. It found that ‘portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.’[2]

Market participants are faced with a huge range of perspectives on responsible investment which will inform their level of inclusion and expectation in this sector. Incorporating responsible investing into a portfolio will therefore take many forms and may range from screening out particular industries or sectors for ethical reasons, to engaging with companies to drive positive behaviour, to investing in readymade strategies.


The manager view: opportunities from the energy transition

Meryam Omi, Head of Sustainability and Responsible Investment Strategy at LGIM, on how the group’s Future World Fund is looking to a low carbon future

The energy transition is happening, and we want companies to be a part of it. Our Climate Impact Pledge is a commitment to engage with those large companies and sectors who are pivotal to the low carbon transition, with potential divestment sanctions applied across a growing range of our funds, covering more than four million pension savers.

Part of our selection process for the fund involves ranking companies according to how they are addressing the transition. If we decide a company is not meeting a minimum standard, we will divest from that position.  But this doesn’t mean we neglect performance. It’s absolutely important to make sure the returns are there because we’re talking about people’s pension funds.

We created a range of indices which takes into account four financial factors and three environmental metrics. The carbon ‘tilt’ has not so far contributed to a loss of performance; if anything, the evidence points in the opposite direction.


The adviser view: creating long term value

Andy Willemite, Financial Planner at Heron House, includes ethical portfolios throughout his strategies

When looking for new funds to add to our preferred list we are now focusing more, but not exclusively, on funds with ESG approaches. We include ethical or ESG funds within our mainstream client portfolios to provide diversification and crucially to provide exposure to some interesting and promising investment themes.

For instance, we have been particularly positive on the Impax Environmental Markets Investment Trust for several years. That provides access to renewable energy and water efficiency, which are areas that are seeing demand increase globally.

We feel these types of holdings are some of the best placed investments to benefit from new technologies and the essential transition to a healthy, low carbon, sustainable economy.

The ESG funds that have produced the best returns within our portfolios over the recent years include: Impax Environmental Market Investment Trust, Royal London Sustainable World Trust, BMO Responsible Global Equity and Baillie Gifford Positive Change.

 

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[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/659079/Executive_Summary_-_Growing_a_Culture_of_Social_Impact_Investing_in_the_UK.pdf
[2] https://thegiin.org/assets/GIIN_2019%20Annual%20Impact%20Investor%20Survey_webfile.pdf

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