Ethical investments have been around for more than two decades but such investments traditionally were rarely, if ever, considered to outperform, so returns for investors were always thought to be pretty poor.
In fact, data from the Investment Association (IA) shows the entire sector still only accounts for only 1.2% of total of assets under management (AUM) in the UK.
Among the arguments against ethical investments are they typically involve screening of opportunities, which reduces investment choice and diversification often leading to poor returns, higher risk, or both.
Another difficulty has been some fund providers have only ever made a superficial commitment towards ethical investment.
But the sector is growing. Since 2007 the independent research organisation Ethical Investment Research Services (EIRS) estimates the green and ethical retail fund market to have grown from a rather modest £8.9 billion to £1.5 trillion last year. And there are plenty of funds outperforming the market average by some considerable margin.
Doing well from doing good
Part of that can be explained by the fact the market has also become more diverse. Where once ethical funds simply avoided sin stocks – tobacco, gambling, oil, and so on – there are now many more funds that specifically target ‘positive’ sectors – the environment, healthcare, technology, inequality and children and young people – or aim to use shareholder engagement to improve corporate behaviour on issues such as climate change.
In fact, investors increasingly want to profit from doing good. No longer is it enough for many investors that the investment schemes they commit to simply avoid social damage. They want a fair market return for supporting companies that make a positive impact.
This is no fad either. Triodos, the sustainable bank, recently found nearly two thirds of UK citizens would prefer their money supported companies that were not only profitable, but also had a positive impact on society and the environment.
Increasingly the way to capitalise on this growth market will be through impact investing: investments that have a positive environmental, social or governance (ESG) impact.
Recent research from JPMorgan forecasts demand for impact investment may reach $1trn (roughly £0.75trn) by 2020.
And while institutional investors were the early adopters in this field, individual investors are a growing in number and their involvement is only set to accelerate.
JPMorgan suggests asset managers will capitalise on this by launching more impact strategies but also that investors will gain a better understanding of what it is and how it works over the next few years.
Even the government has noted the desire among individuals that their investments have a positive impact on society. In the 50-page government-commissioned report Elizabeth Corley, chair of Allianz Global Investors said there was “growing interest among individuals for their investments to have a positive impact on society, as well as produce financial returns” but that the market remained “underdeveloped”.
Understanding changing investor attitudes is a key factor for any adviser that wants to capitalise on this growing trend for socially responsible investing.
The shift to impact investment offers a number of opportunities as well as the prospect of taking a key role in an investment approach that will increasingly be seen as standard.
Advisers should not see the move to impact investing as a separate discipline, but as essential as any other investment product, likely to be packaged within a tax efficient Enterprise Investment Scheme (EIS), which involves all their traditional skills of financial analysis, asset allocation and client care to ensure they meet their clients’ objectives.
Triple Point Impact EIS
Such is the opportunity presented by impact investment Triple Point has launched an Impact EIS initially raising £10m that will offer investors a portfolio of between 8 and 12 fast-growing companies across four key sectors – the environment, health, inequality and children and young people. A minimum investment of £25,000 will provide scale-up capital for revenue-generating companies, which have the potential to achieve returns of 5-10x. The capital should be deployed over 12-18 months and the target is to exit investors four to seven years after allotment.
Assisting clients in shaping their portfolios to deliver robust market returns alongside positive environmental and social impact can help build longer lasting relationships and involve co-operating on a much deeper, personal level.
Those advisers that become early adopters of impact investing are likely to strengthen not only their client relationships through more in-depth, meaningful collaboration but also their own businesses.
This is a guest contribution from Belinda Thomas, partner at private investment specialists Triple Point, which has more than £900m AUM.