Throughout history, people have wanted to do the right thing, from the Hippocratic Oath taken by doctors to “first, do no harm,” to Google’s infamous mission statement “Don’t be evil.”
But there are ethical dilemmas to face when it comes to turning a financial profit from doing good – which is why many worthy causes operate as non-profit entities and charities.
Impact investing is a relatively recent emerging trend, built on the backs of sustainable, ethical and eco-friendly investments over the preceding decades, and tapping into major trends in the 21st century like human rights in emerging markets and environmental concerns globally.
There’s even an annual awareness drive, Good Money Week, which takes place each October and aims to encourage more people to invest in companies and stocks with clear ethical credentials.
And it’s not limited to investing in stocks and shares, either. Good Money Week spans the entire financial services sector, from current accounts to pensions and everything in between.
Yet despite this, ethical funds account for less than 2% of total UK investments – so there’s a long way to go before impact investing and its equivalents become the mainstream market option.
Do impact investments perform well?
To really hit the mainstream, impact investments need to perform on a par with their conventional equivalents.
Not all investors are driven by altruistic motives, so a large percentage of market share will be profit-driven in the years to come, no matter what concerns consumers raise surrounding climate change, human rights and so on.
But that’s not necessarily a problem. There are already indications that funds that commit to certain criteria on ethical, social and governance (ESG) factors actually outperform the market average – and have done so for the past half-decade or more.
Ahead of the most recent Good Money Week in October 2019, Rathbone Greenbank Investments surveyed high net worth individuals to find out how they prioritise ethical investments, and to what extent they act on those ethics.
The results were a mixed bag for impact investing:
- 74% held at least one stock that they knew did not meet their own ethical criteria.
- 45% cited a lack of available ethical funds, while 41% were just diversifying their risk.
- Yet 81% expressed an interest in investing ethically in the future.
So, the demand is there among individual investors – which the report suggested is likely matched among consumers when it comes to making personal pension investments.
No negative impact
One way the markets are meeting this demand is by offering funds with little to no negative impact, rather than stocks with a specific positive impact.
For example, it’s now quite common to see funds that avoid investing in fossil fuels, petrochemical exploration, tobacco, and other troublesome markets.
It makes sense for funds to do this – with consumer demand growing and a relative lack of supply in the investment sector, those that cater to impact investors’ ethics should reasonably expect to receive greater deposits.
The question is whether this relatively high demand and/or relatively low supply can continue – ironically, whether or not the impact investment market itself is sustainable.
But with an increasing amount of money flowing into ethical investments across all sectors and right around the world, there is still plenty of ground to be gained before supply starts to exceed demand for impact investment options.
Sustainable stocks and pension profits
While it can be tempting to associate ethical investment with the younger generations, one area where sustainability aligns well is with saving for retirement.
Sustainable stocks are by definition more likely to continue trading successfully over the long term, and that can make them a good candidate for investment by managed pension funds.
Ethical pensions tap into that consumer-side demand, which is one area of the potential market size that has yet to be fully developed and which again could help to add some much-needed percentage points to impact investing’s market share.
For career investors, good stewardship on environmental and ethical factors can translate into higher confidence of careful financial management too, making sustainable stocks a more tempting proposition.
Investing for positive impact
If ‘no negative impact’ is not enough, there are options that allow for positive impact investment instead.
Some of these combine the positives with avoiding the negatives, such as Rathbone’s Ethical Bond Fund, which excludes alcohol, tobacco, gambling, animal testing, mining, nuclear power, weapons, and adult entertainment, while specifically including only stocks that demonstrate at least one positive impact for society, the environment or corporate governance.
Alternatively, there’s the Pictet Global Environment Opportunities Fund. This supports organisations that are actively addressing environmental challenges. Companies must also meet certain safety criteria in nine categories including biodiversity and climate change.
The richness and complexity of the impact investment sector is increasing all the time, and that gives investors – both individual and institutional – more options with a greater chance to align with their own ethics.
Whereas in the past, there may have been poor availability of funds that closely matched consumers’ and investors’ priorities, we may be at the tipping point beyond which impact investing becomes a realistic option market-wide.
If so – and if supply can continue to grow to meet the full level of demand that’s already out there – we could see impact investments snatch a much more significant share of total funds under management and really hit the mainstream in the coming decade.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.