Are your investments doing ‘good’?

The campaigners behind Good Money Week, a UK-wide initiative staged in mid-October to raise awareness of sustainable, responsible and ethical finance, are pushing at an open door. As in other countries, the number of investors in the UK who are interested in doing good with their money, in addition to doing well, has grown rapidly in recent years.

Moreover, while we used to define this approach to finance in narrow terms – avoiding investment in companies involved in certain activities, say – the debate has developed into something much broader; increasingly, the focus is on impact investment. According to the Global Impact Investing Network, this spans “investments made into companies, organisations and funds with the intention to generate social and environmental impact alongside a financial return.”

Interest in impact investment is a global phenomenon and mirrors the growing enthusiasm in many societies for spending money more thoughtfully. One recent survey of 30,000 people in 60 countries conducted by market research group Nielsen found more than one in two had, in the previous six months, bought something from a company they regarded as socially responsible. Eurosif, the sustainability group, says Europeans have now put more than €20bn into investments regarded as sustainable and responsible – and that such investment has been growing at more than 20% a year since 2011.

The principle underlying impact investment is that your portfolio, and all the investments within it, have an impact on the wider world. If you’re an impact investor, you actively seek to build portfolios and hold investments where that impact is a positive one that aligns with your own values and principles – while also recognising there is a commercial and economic value in businesses that grow sustainably and responsibly.

Of course, people have been making investments according to their values for years – via funds that avoid certain types of company, for example, or through their individual support for certain businesses. But obstacles have prevented broader impact investment being adopted more widely. Not least, investment professionals have only recently begun to develop robust methodologies for measuring impacts, whether positive or negative.

The big question for financial advisers and investors alike, moreover, remains the same. It is whether they will have to accept reduced financial returns if they embrace the idea of impact investment. Investors naturally want their wealth to increase, but worry that investing with impact in mind means you will have to accept less growth.

In fact, this is not what the data shows. In recent years, two separate studies, from the Wharton Social Impact Initiative and the Global Impact Investing Network with Cambridge Associates, have concluded that equity impact investment funds had delivered returns that were competitive in relation to comparable traditional investments.

More fundamentally, it may be a mistake to think in such binary terms – this is not a zero-sum game. Very often, the goals of shareholder return and positive impact are complementary.

How, then, to get exposure to interesting portfolios of impact investments? Well, the closed-ended fund sector is certainly a good place to start for those looking for the collective fund approach. In sectors such as Environmental, Renewable Energy and Healthcare, as well as through individual funds in a range of other categories, investment companies offer a broad range of impact opportunities.

The structure of an investment company, moreover, is well-suited to this type of investment, which may often be in unquoted and illiquid holdings. The closed-ended nature of the fund makes it more practical to manage such holdings.

This is not to suggest impact investment is for everyone – but for those who are looking to embrace the ideas expressed during Good Money Week, investment companies may be a very practical way of doing so.