This week we are delighted to introduce you to our newest discretionary manager partner, EQ Investors (EQ). By way of an introduction we thought we would share this informative article by Damien Lardoux, Portfolio Manager at EQ on the topic of impact investing (alternatively, you can visit the EQ dedicated page).

It’s startling to consider that in a country as prosperous as the UK 2.3 million children are living in poverty. Or that in a country which prides itself on its Olympics success, 1 in 4 adults are obese.

We all know that there are huge social, economic and environmental challenges facing the world. And while deficit-ridden government budgets are getting tighter, these problems aren’t going anywhere.

That’s why it’s more important than ever to think laterally and find ways to fund solutions to these urgent challenges. When I began my career, the concept of an investment approach which not only delivers an attractive return but also a positive contribution to society or the environment was in its infancy.

The opportunity

Impact investing has certainly come a long way in the intervening ten years. According to the Global Impact Investing Network (GIIN), $60 billion went into impact investing worldwide in 2015, and JPMorgan are forecasting that impact investing could reach $1 trillion by 2020.

This will be driven by those that want to invest in ways that support their beliefs and make a difference. In a recent Triodos Bank survey, it was found that over 60% of investors would like to support companies which are both profitable and make a positive contribution.

The positive impact approach

In response to this growing demand, EQ Investors (EQ) designed a unique investment strategy called Positive Impact. The best companies have always been the ones that innovate, find new ways to serve real needs and solve real problems, and we wanted to capture these impact investment opportunities.

The positive impact approach seeks out companies that create social, environmental and economic value (positive screening), whilst avoiding companies that are obviously harmful (negative screening).

Positive screening examples
Negative screening examples
·       Clean fuels ·       Coal & oil
·       Sustainable forestry ·       Nuclear energy
·       Water resources ·       Animal testing
·       Recycling ·       Political corruption
·       Job creation ·       Poor corporate governance

Each portfolio is constructed from 20-25 funds. We build long term relationships with our fund managers and engage proactively with them on issues like those above.

Analysis also takes into account environmental social and governance (ESG) matters relevant to a company’s strategy and operations.

Changing mindsets

The rapid growth of impact investing has been countered by concerns about simultaneously achieving social impact and market-rate returns. A benchmark study published by Cambridge Associates found that impact investing can capitalise on long-term social or environmental trends to compete with, and at times outperform, traditional asset class strategies.

Indeed, the positive impact approach itself favours companies that are trying to do good and run their businesses in a sustainable manner. Such companies avoid fines and other penalties; they have stronger relationships with their customers, suppliers and employees. Furthermore, they tend to operate in emerging sectors with high-growth potential.

 

The benefits

Impact investing can be a great way to add diversification to your core portfolio. Within the EQ Positive Impact Portfolios, no fund is included based on its social or environmental credentials alone – it must also aim to deliver an attractive return for its sector of the market.

Impact investing has the added benefit of benefiting your children and their offspring. Many of the world’s biggest problems – resource scarcity, clean energy, education, housing, urban transformations, require significant investment.

 

Impact investing for everyone

Impact Investing is becoming more and more accessible to UK retail investors with close to 90 ethical and sustainable investment funds managing more than £13.5 billion of assets currently available.

We’ve seen a number of new fund launches over the past months, particularly passively managed exchange-traded funds (ETFs) from the likes of BlackRock. Not only are these funds driving innovation in the sustainable investing space, but as more asset managers get involved and the competition increases, we’ll see a downward pressure on fund costs, directly benefiting investors.

At EQ, we’ve seen growing demand from advisers for our positive impact approach. In the last few months we’ve extended our platform presence and the EQ Positive Impact Portfolios are now available via Nucleus and Transact. We are committed to working with advisers and ensuring the portfolios are available to your clients where possible.

 

Future state

Today there is a real opportunity to create a more integrated view of finance where people see that aligning their money with their values not only makes sense, but that it is critical to building the kind of world we want to live in.

I have no doubt that in time all investment decisions will factor in their social and environmental impact – the fast lane beckons.

 


This article was created for the DISCUS website by Damien Lardoux, Portfolio Manager at EQ Investors. You can find out more about the EQ Investors discretionary investment services here ›