Bringing in new clients via impact investing
Impact investing seeks to have a positive effect on social and environmental issues and is increasingly attractive to clients who want their money to make a difference
Model portfolios targeting investments that seek to have a positive effect on social and environmental issues are a means to attract new client revenue as well as better serve clients who favour ethically driven investments.
Typically, ethical funds take an investment approach that screens out certain sectors, such as tobacco, pornography and armaments. However, some argue that this negative screening does not go far enough. Impact investing takes the process a stage further, as it screens out controversial areas but also invests in companies that are actively seeking to have a positive effect on society or the environment. Where this can be shown to have a beneficial impact, it can make for a more attractive investment strategy for clients than one that simply excludes certain sectors.
Damien Lardoux is joint portfolio manager of three risk-adjusted impact investing model portfolios for EQ Investors and says that in the past few years there has been a desire among ethical investors to move beyond negative screening and seek out ways to make their investments work harder in effecting change. “What we’ve seen is people taking the view that screening out controversial sectors is not going far enough and they are responding well to a strategy of investing in companies that are looking to have a more positive impact,” Lardoux says. “We set up our three portfolios to identify and invest in funds which undertake positive screening, seeking out companies that are having that positive impact on social and environmental issues.”
As examples of funds in which the portfolios are invested he cites, as a mainstream fund, Jupiter Ecology, “an environmental fund that invests in companies that are looking to reduce water waste, increase waste management, improve energy efficiency and also invests in renewable energy, among other areas.” A less well known fund in which Lardoux is invested is the Wheb Sustainability fund. This looks to long-term trends and themes, such as energy efficiency, environmental issues, improving water infrastructure, and healthcare.
Impact investing funds will also challenge companies on their operational practices and their reporting, seeking to change their behaviours.
From an investment performance perspective, Lardoux says environmental funds have been benefiting recently from the growing need for corporates to find ways to reduce their energy bills. This is driving them to use companies that can help them to better manage their waste and to increase energy efficiency. “They may not be ecologically minded but corporates are seeing the benefit of bringing in these companies to help them reduce their cost base,” he says. “That is creating opportunities for investment into the service providers.”
In addition, as fund managers that follow impact investing themes tend to invest with a longer term view, turnover of holdings can be lower than the average retail fund, Lardoux says. “Fund managers tend to have at least a five-year view, so while they may trim and take profit if a company is doing well, we don’t see funds turning over companies very often.They also tend to know the companies better as a result. ”
Measuring what can be intangible effects of the investments in the short term can be difficult to achieve, says Lardoux. “Investors quite reasonably want some evidence that where they are putting their money is having the kind of impact they want to see. They want proof that the investing is leading to positive change. So on a quarterly basis we send investors a newsletter called the Social Environmental Update in which we focus on three companies, the solutions they are providing and how they are having an impact on social or environmental issues.”
As an example he cites home insulation company Kingspan, invested in by the Old Mutual Ethical Fund, managed by Impax Asset Management. “One of the key themes of the fund is the increasing demand for energy efficient solutions. UK housing is amongst the least energy efficient in Europe and one of the most expensive to heat properly. One of the main consequences of poor home insulation is energy wastage, estimated at the equivalent to 22 power stations. Old Mutual Ethical fund identified Kingspan, an Irish listed company providing home insulation, as a company that will benefit from increased demand for home insulation while also having a positive impact on energy conservation,” Lardoux says.
For clients wanting their investments to make a difference, impact investing offers the next stage in ethical and socially responsible investment, which, through individual case studies such as Kingspan, can be seen to be have a positive effect on society or the environment.
The EQ Investors portfolios were launched in 2012 and are currently available on the Novia platform, with plans to offer them on other platforms in the pipeline.
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