29 Sep 2021
What sort of returns are you looking for?
By James Goodman
Investing used to be about targeting the best financial return – pure and simple. However, in recent years, the once niche idea of looking for an additional type of return - a ‘social impact’ return – has come into consciousness for many people.
The theory behind a social impact return on investment is to use one’s capital to avoid harm or to facilitate positive outcomes in the world.
We’ve noticed it in the news (think of the big superannuation funds divesting their interests in coal companies) and anecdotally amongst our clients who are increasingly interested in using their capital to avoid harm or to promote positive environmental, social, and governance (ESG) outcomes. An example of a positive impact investment approach might be to actively seek out investment in biotech companies researching and developing cancer treatments.
Of course, avoiding harm and promoting good are subjective concepts, and a few patterns have emerged over the past 10 or 15 years.
Spectrum of capital
The diagram below seeks to show the full range of investments. From traditional investments with a purely financial return focus on the left, through a range of ESG investments in the middle, and ending with impact only purely donations on the right.
Source: Phenix Capital Impact Management Assessment 2019
Negative screening
Often the first step in ESG investing, ‘negative screening’ is the specific exclusion of assets for personal ethical reasons. For instance, plenty of people have told me they don’t want to invest in companies that manufacture armaments or cigarettes.
The sweet spot?
For many, the optimal ESG investments fall under the ‘Financial-First’ column. Here, investment capital is used purposely and effectively to make positive change, without sacrificing anything in the way of financial return. This is a very tall order in practice, but possible.
Impact-first investing
Investors in the ‘Impact-First’ column are willing to accept a less than market rate of return for the risk taken, with a view to achieving a greater social outcome. An example might be purchasing a social impact investment bond with a coupon rate of 6 percent, but where an objective risk-assessed rate of return for that bond would be 10 percent.
Who’s doing it?
Big super funds are doing it, in part due to pressure from their members. Individual investors are doing it, and philanthropic investment funds are doing it. There is an oft-considered theme in the philanthropic investment fund world that one’s investment capital should be put to good use ‘in addition to’ the annual granting donations made from such funds.
Our ESG results
When we’re looking for ESG and social impact investments, we’re faced with two inherent issues.
First, finding investments that fit both the highest quality financial and ESG criteria is not easy. There is a seemingly endless number of investment types, but very few which can tick both boxes.
Secondly, every investor’s ESG views are different. One person’s climate-saving nuclear power, for instance, is the next person’s 1,000 years of unacceptable radioactive waste. Also, whilst measuring the financial return of an investment is relatively straightforward, measuring the social impact return of an investment is far more difficult.
We can help
Despite the challenges, we’ve been able to find assets for each of our clients to match with their individual ESG views. Importantly and pleasingly, we’ve been able to do this in a way that hasn’t compromised their financial goals. Contact us to learn more about ESG investing and for assistance with your queries.