Written by Steve Kenny, Commercial Director, Square Mile Investment Consulting and Research
Impact investing is on the brink of a hockey-stick style period of growth which will see it receive rapid and widespread adoption in the marketplace. It is fair to say that this approach is one of least understood areas of the Responsible investment landscape, clouded with a number of myths, such as concerns over liquidity.
However, asset managers are now addressing these misapprehensions, and impact funds are due to come out of the shadow of other more widely known Responsible strategies.
Impact investing originated in the unlisted markets but has been increasingly applied to listed securities over recent years. In its true form, it describes an investment that aims to make measurable social or environmental impacts.
Funds that follow this approach tend to adopt distinctive, concentrated strategies and are often mapped to the UN Sustainable Development Goals. Some might exclusively invest in environmental solutions for instance, whilst others have a broader approach which may embrace several themes.
Impact reporting typically includes metrics such as renewable energy generated, waste recycled, patients treated, and affordable homes provided. This gives clear visibility for investors on the social outputs associated with their investments through real-life outcomes.
As many of these strategies are relative newcomers, their track records may be shorter than other Responsible investment funds but nonetheless they have frequently generated returns well in excess of comparable conventional funds.
Despite the fact that impact funds have a shorter history and are less widely known than other vehicles with a social conscience, they have quickly made up any lost ground. The Big Exchange, a consumer-focused investment platform launched at the end of 2020, is an excellent illustration of this point.
This platform has two driving principles which means it only offers impact style funds. First, it is built on the fundamental belief that clients are not only looking for a financial outcome, but they are also seeking to help achieve a positive outcome for the environment and for society.
Second, it embraces the notion that people do not want to save for their futures if the future itself is compromised by their investment decisions. This dual purpose has clearly resonated well with many investors from a wide range of backgrounds.
Evidence from The Big Exchange’s own client-base demonstrates this interest in aligning financial gains with positive impact is not limited to younger investors who are typically associated with impact investing. Over the four months since launch, it has attracted clients that are equally spread between 18 and 75.
Nor are these investors first-timers: two thirds hold other investments elsewhere – a clear indication that money is following morals.
It would be impossible not to be aware of a broader societal shift to a sense of an individual’s responsibility for addressing the daunting challenges that face the planet. From Greta Thunberg holding the UN to account, to the rise of conscious consumerism, from movements such as Extinction Rebellion to mainstream TV programmes such as the Blue Planet, the message rings out loud and clear that by acting together, we can all make a difference to building a better, more equitable world.
This message is not lost on the giants within the financial services industry. In 2020 BlackRock CEO Larry Fink wrote to investors on the importance of climate change and the role the asset management industry must play in tackling this challenge. In his view, Responsible investment is going to reshape finance as we know it.
When the leader of the world’s largest asset management group talks publicly in these no uncertain terms, you can be sure the rest of the financial services industry is going to pay attention. Indeed, one in ten customers of HSBC and Barclays have said that they would take their accounts elsewhere if they knew that their bank was investing heavily in fossil fuels. That is a sizeable number of clients and would represent a huge financial loss for their respective banking partners.
The asset management industry has taken note of this change in investor appetite as evidenced by the raft of new propositions launched with an impact focus. According to Morningstar, 505 new
sustainable funds or funds that have responsible, sustainable and impact mandates came to the market in 2020, with just shy of 150 in the final quarter alone. This has led to a significant increase in assets held in these kinds of strategies.
Over the course of 2020, assets held in investment vehicles which seek to have a positive impact increased by 52% in Europe and the UK, to total 1.1 trillion euros. Amongst these, funds that seek to address climate change were among the best-selling funds. On the flipside, and equally significant, were the outflows from funds that had exposure to industries with high carbon emissions.
This rise in impact investing is receiving a further boost from regulatory intervention. In March, the EU implemented a range of new sustainability regulations through its Sustainable Financial Disclosure Regulations (SFDR).
These put an emphasis on increased disclosure on funds’ holdings at a security level and while a number of these regulations have not yet been gold-plated into UK regulation, the FCA is looking to apply equivalent reporting requirements. Indeed, with the Chancellor of the Exchequer backing the City of London to be a leader in green finance in Europe, if not globally, the overall direction of travel is clear.
All this creates a perfect storm for impact investing: a huge uptick in demand from investors, matched by the proliferation of these kinds of strategies within a wider political environment which wants the fund management industry to play a central part in a brighter future for all.
The strong performance of many impact investing strategies, which has left more conventional funds in their wake, demonstrates that generating a financial gain and a positive outcome for society or the planet are not mutually exclusive.