Guide to impact investing for beginners

A guide to impact investing explains how you can achieve financial returns and do good for society. Clemence Chatelin of Paradigm Norton explains how it works

 Guide to impact investing

The United Nations Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all.

Impact investing is a way of investing that not only brings financial returns but also has a positive impact on society.

Most fund managers and organisations orientate themselves on aligning their impact goals and investment themes to those of the United Nations’ 17 Social Development Goals (UN SDGs). These are:

  • No poverty;
  • Zero hunger;
  • Good health and well-being;
  • Quality education;
  • Gender equality;
  • Clean water and sanitation;
  • Affordable and clean energy;
  • Decent work and economic growth;
  • Industry, innovation and infrastructure;
  • Reduced inequalities;
  • Sustainable cities and communities;
  • Responsible consumption and production;
  • Climate action;
  • Life below water;
  • Life on land;
  • Peace, justice and strong institutions, and
  • Partnership for the goals.

The UN SDGs are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. The Goals interconnect and in order to leave no one behind they have a target achievement date of 2030.

 

 

How can we invest impactfully?

Impact investing can be achieved on a scale of ‘finance first’ to ‘impact first’.

‘Finance first’ investments are, for example, a company producing recyclable packaging or building affordable and sustainable housing. The companies are for profit companies which deliver a day to day service or product, their operations are also sustainable across the supply and their product or service is contributing to achieving the UN SDGs. The companies are usually publicly traded on stock markets.

‘Impact first’ investments are, for example, supporting social enterprises directly or charities through a social impact bond. The social enterprises must have a sustainable business model from a revenue perspective but it’s main mandate is to deliver a service or product with a positive impact in the community. For example, a company that is growing food and employing ex-offenders to re-introduce them to the community. This is expected to decrease the rate of re-offending in the community.

With a social impact bond a charity is receiving a mandate to resolve a certain issue such as homelessness. The charity receives a target set by the government and the funding from private investors. If the charity hits it’s targets the government pays the investors back with interest. However, if the charity does not meet its target, the investor may not receive a return.

Unlike philanthropy, where the money given will never be returned, impact investing provides the opportunity for investors to have a positive impact with their money and to potentially recycle any committed capital.

How can you access impact investing opportunities?

‘Finance first’ companies can be accessed through various investment platforms either directly or through a mutual fund such as a unit trust or open ended investment company (OEIC), however funds in this area need to be actively managed to select the ‘right’ companies and therefore tend to hold very few stocks (25-80) making them riskier than an index tracking fund but potentially much more impactful.

‘Impact first’ companies can be accessed through innovative finance ISAs and crowdfunding but their inherent risk makes them more suitable to sophisticated investors, therefore it is best to speak to a financial adviser to determine whether you can afford to potentially lose all the capital you have invested. Social Investment Tax Relief schemes can provide a basket of social enterprises to invest in your local region or all across the UK, however the minimum investments are fairly high.

How do I know if the investments I choose are impactful?

Impact investing is still very much subjective and down to the selection methodology of the fund manager for active funds. For index and exchange traded funds (ETFs) the selection methodology is in the hands of the rating agencies. Therefore, like with every investment solution it is very important to look under the bonnet.

For example, some fund managers would hold a company such as Procter & Gamble, this is because ca. 50% of their revenue is generated through the sale of sanitation products, therefore it is helping towards the SDG 6 ‘Clean Water and Sanitation’. However, any inquisitive person would also point out that P&G are responsible for much of the plastic and nappies (with a 57% market share for nappies!) we find in landfills and in our seas. Labelling P&G as a company with a positive impact can seem a little farfetched to some. Others would argue that a company such as P&G is an excellent company to hold because there is a lot of scope for shareholder activism and engagement to turn the company around to be more sustainable.

Additionally, every fund manager will report on impact in a different way and not every company in the fund will give the required data to the fund manager. This can make it complicated when guaranteeing that the fund manager delivers on the impact promised.

I suggest talking to an adviser who will be able to develop a portfolio suitable to your preferences that will make sense financially and from an impact perspective. It is important to balance costs with performance, financial needs, attitude to risk, asset allocation and exercise ongoing due diligence on the fund manager.

Clemence Chatelin is a financial planner at IFAs Paradigm Norton

Further reading: What is impact investing?

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