The investment community has long been mainly the preserve of men. However, in the immortal words of Bob Dylan, ‘the times they are a changing’, and with them we bear witness to progressive developments beyond the obvious, and undoubtedly a force for good, which we would like to explore and share with you.
More and more individuals are looking to invest in a manner that is consistent with specific principles and values. It is not uncommon for individual investors to express concern about how their investment decisions affect the world they are creating for future generations. There are an increasing number of emerging investments designed to put money to work in social purpose businesses to create sustainable social change, as well as the potential for a financial return. Changes both from within the charity sector and from donors have pushed philanthropic organisations to be more commercial in their approach. At the same time, business models are developing that align business strategy to remedy environmental and social challenges.
Responsible investing is a topic of increasing interest, particularly among certain profiles of investors. Yet, proposed legislative rollbacks on corporate governance and climate change, particularly in the United States, have roused concerns about the impact on environmental, social and governance (ESG) investing.
It has long been the case that family business owners derive real value in being able to talk to peers about the challenges and opportunities they are each dealing with at any point in time. Frequently those challenges relate to logistics or resources or competition from larger firms, as well as how the business and family interact through governance structures (or the absence of them). Among the opportunities is the ability to reflect core personal values in how the family business operates, which was the topic of a very interesting gathering recently.
As Autumn sets in, thoughts may sometimes turn towards year end planning strategies to help minimise tax. For US persons, donations to charitable organisations are often on the list of tax saving opportunities available. However, many charitable organisations are only considered to be qualified non-profit organisations in one jurisdiction or the other. As a result, giving directly to charities in either the US or the UK can be just a one-sided benefit.
Utilising a dual tax qualified gifting structure could allow individuals who have personal tax liabilities in the US and UK to benefit from charitable tax relief in both jurisdictions. Not only could the donation (and the donor) benefit from Gift Aid in the UK but the donor could also benefit from a tax deduction from their US tax liability as well.
The development and evolution of a social investment market is predicated on the belief that there are organisations which can produce social outcomes and, for some investors, these outcomes may also result in a financial return. Nevertheless before one broaches quantifying the impact or return from a social investment, a primary challenge for an investor is to qualify the organisational capabilities of the charity or institution that will be in receipt of the investment.
Organisational capacity and quality is crucial to producing the maximum social return. In the first instance securing investment is no easy feat and the growth of a social investment market with consistent funding should not be the only consideration when looking to resolve the world’s most pressing social issues. One must find organisations that are designed and able to tackle the issues in a coherent and efficient manner. The ultimate outcome should be a positive social impact and the production of a financial return.
Back in 2008, around the time of MASECO’s inception, iShares were quick off the mark to set up an exchange traded fund investing solely in global green-energy stocks. The world was on its knees, but green energy offered a rare ray of sunshine, if you will excuse the pun, and green energy stocks were very much in fashion with prices to match, so this seemed like a great idea from iShares. But sadly fashions do not endure, as the dot com boom painfully taught us, and today the iShares ETF is down an eye-watering 79% since its inception (Source: Morningstar). However, the good news is that there are other ways to vote with your feet and “go green” from an investment perspective. While the very narrow class of green energy stocks had had a turbulent time of late, it is not all doom and gloom for tree-hugging investors – far from it. A more sophisticated approach is to start with a broad asset class, for example the MSCI All Country World Index (ACWI), and then overweight companies with the greatest green credentials, while underweighting or screening out entirely those with the worst track record. Blackrock has recently published a paper claiming that it is possible to track the MSCI ACWI with an annual tracking error of just 0.3%, while investing in companies with annual carbon emissions 70% lower than the index as a whole (Source: Blackrock Investment Institute). 30 basis points seems like a reasonable trade off to lower the emissions billowing out of your portfolio by a whopping 70%. There is also the additional cost of carbon screening, but this tends to be a fairly manageable 10 basis points or so (0.1%).
I attended a Harvard Business School alumni event this week where Sir Ronald Cohen was setting out the case for impact investing. Impact investing is where one makes an investment decision not only on the grounds of risk and return but also on the social impact it generates. Ronald is arguably the father of social investing in the UK and also the father of venture cap investing (he started Apax Partners in 1972).
Sir Ronald pioneered the first social impact bond in the UK. A social impact bond is a contract with the public sector (or foundation) where a commitment is made for an improved social outcome that result in public sector savings. It is not really a ‘bond’ in the financial sense as its payoff is more equity based. Sir Ronald was explaining that this type of financial innovation can potentially solve a social problem, by putting a framework around success or failure (of the social problem), which one can therefore price, this creates a risk and reward dynamic and can attract private investors. The challenge with these type of structures comes in the measurement of success and failure and the significant amount of work needed to go into the design and structuring of each transaction.
Companies and financial institutions are taking the lead on sustainability. The journey to this point has been a long one as initially the rise of environmental issues was seen as a bit of threat. As a defence to this perceived threat it was no surprise to see the somewhat more vulnerable companies adopting the sustainable language early. You may recall the likes of Shell being one of the first to talk about the triple bottom line (people, planet, and profit) and BP aiming to go “beyond petroleum”. Over time forward thinking companies (Unilever and Ikea as examples) realised they could save money through better environmental management and boost their external credentials at the same time.
Following on from the introductory post on sustainable investing dated 18th December I thought I would tackle head on some preconceptions that stop investors accessing the capital markets with a value based approach. The pushback often heard when broaching the subject of sustainable investing is, “Yes, in theory the idea is attractive but I don’t want to give up return.” The notion that voting for the good guys with your capital will disadvantage you is entrenched – but is it right?