By Richard McCreery
This article is published on: 8th October 2024
Impact investing is increasingly becoming an important element of ESG-orientated investment portfolios.
Many people are familiar with the concept of sustainable investing, where a company may incorporate Environmental, Social and Governance (ESG) principles into its decision-making and risk management.
The aim is to promote positive long-term values that should improve the way a business is run by aligning its interests with those of society.
For example, in order to improve its effect on the environment, a company may introduce measures to reduce its carbon footprint, to minimize the use of finite resources or to eliminate waste. To improve the way it plays its part in society, it may insist on minimum standards in labour practices in its supply chain, it may introduce policies to expand its gender diversity or it may fund projects that build its standing in the community. When considering governance issues, a company might focus on how it balances executive compensation with performance, it might assess how ethical its operations are or it may improve transparency in its financial reporting.
Over the long term, it is believed that a more principled company culture that ultimately makes it more sustainable will improve the financial performance of that business, creating a win-win for all stakeholders. That is why the global ESG investing market was estimated to have grown to more than $25 trillion in size by 2023.
Sustainable investment funds that invest in a range of underlying companies may choose to exclude certain industries or sectors that don’t comply with ESG principles, such as gambling, tobacco or controversial weapons. But they may also choose to favour companies that have a strong ESG rating, that have made a conscious efforts to develop better behaviour along defined guidelines, such as those laid out in the United Nations 17 Sustainable Development Goals.
Impact investing goes one step further, because it favours companies that intentionally make a measurable positive contribution towards solving environmental or social problems alongside a financial return. It fills a funding gap when traditional philanthropy and government aid might be insufficient. Investments could be in healthcare, education, recycling, social housing, sustainable agriculture or climate change action. For example, investing in a renewable energy company could positively impact climate change, whilst investing in a plant-based meat company could positively impact public health and the environment.
Today, fund managers can incorporate impact investing into their sustainable funds or as part of an overall ESG strategy, ensuring that investors have the opportunity to make a financial return and generate a positive return for society. As you would expect, the addition of investment criteria other than just financial performance means that more work has to go into researching and selecting the best investments. However, clients can gain exposure through individual funds or managed portfolio services that offer liquidity, expertise and ongoing monitoring to ensure that goals are met and principles are adhered to.
If you would like to find out more about how to align your investments with ESG criteria and make impact investments, please get in touch.
At Spectrum, whilst we are committed to offering comprehensive solutions for sustainable investing, we also believe that all clients should decide freely on how to allocate their capital. We recognise too that no single, simple solution exists for how to invest responsibly. For these reasons, we include responsible investment discussion in our advice process but do not impose personal or corporate views.
