A new era for sustainable and impact investing?

Jonathan Brinsden Partner

COVID-19 has amplified tremendous inequalities in our society across a range of issues including access to healthcare, education and work. The scale of the challenge has reinforced the notion that returning to ‘business as usual’ as lockdown eases will not be enough. Working in isolation it seems neither the free market or big government or the third sector will be able to provide the solutions to the social and environmental challenges that we face.

However, impact investment may provide the tools to bring about a closer collaborative effort across these three pillars to improve our society. It has therefore been heartening to see, against the punishing backdrop of COVID-19, a profound change in investment behaviour toward sustainable and impact investment. This change has been helped by a confluence of trends and activity:

A shift in societal values – consumers and investors have made it clear that they no longer wish to purchase from or invest in companies which are destroying the environment, treat their staff or their suppliers unfairly or which only give social media lip service to equality, diversity and inclusion initiatives. This has been reflected by the stampede to ESG orientated portfolios (ie investments which have regard to how well a company adheres to good environment, social and governance standards) , the total value of which now stand north of $40 trillion. Whilst this may in part be because ESG funds have outperformed benchmarks during the market downturn, it is also fair to say that as a result of the pandemic consumers may be more concerned to ensure that their personal actions help address social issues. In response companies are already making fundamental shifts in their strategies, product lines, and operational models to build in sustainability.
Government initiatives – regulators and policy makers are more interested in this area because they recognise the need to harness the power of investors and companies to help solve social problems such as environmental pollution and workplace diversity. The UK, EU and the US have made bold climate change commitments as they take aim at net-zero by 2050. In addition there is a move towards standardising impact metrics which will take company reporting beyond the financial and allow investors to assess ESG performance in a reliable and transparent way.
Technology – technological innovation now enables us to measure positive and negative impact and calculate its monetary value. Monetary valuation of impacts will allow investors to make informed decisions not only on financial metrics but also on the broader impact a company has on society and the environment.

Although ESG has grown significantly in importance it is only one subset of the wider social investment family other members of which have not yet gained equivalent traction. Whilst there is some cross over with ESG, social impact investment is actively concerned with providing solutions to the world’s great challenges alongside delivering a financial return. It is a more complicated beast than ESG and has proven to be less accessible as a consequence but that is now starting to change and many types of investors including pension funds, not for profits and governments are entering the growing impact investing market.

Investors who are subject to fiduciary responsibilities like pension and charity trustees can take comfort from the growing body of evidence which demonstrates that impact led investments which avoid harm and provide social solutions can mitigate financial risk and may provide opportunities for financial outperformance This dovetails neatly with the fiduciary obligation to act as prudent investors.

Charity trustees in particular have a good deal of latitude to invest in this area. Both the Charity Commission and HMRC recognise that charities may invest their assets in a manner which advances their charitable purposes enabling them to align their investment activity with their charitable mission. However, aside from a handful of notable exceptions, charities have been slow to re-imagine their investments on an impact basis often adhering to the risk averse aphorism ‘you can’t be fired for buying IBM’.

It is understandable that charity trustees, who shoulder an enormous weight of responsibility in the proper application of charity resources, might be reluctant to depart too far from what are regarded as the established norms. But, in a time of scarce resources and increasing challenges, Boards should now ask themselves how, by doing good through their investments, they can leverage their organisational impact beyond delivery of charitable activity. Indeed it is arguable that such considerations should be embedded into all investment mandates.

Despite the challenges there should be a sense of optimism from the progress which has been made so far and the enormous potential to drive positive social change. Sustainable and impact investment provides an opportunity for consumers, investors, institutions, governments and charities alike to play a meaningful role in moving us to world where all investment is impact investment.