How the UK’s growing appetite for ESG investing could impact your portfolio
In a record year for environmental, social and governance (ESG) investing, last year saw UK 'impact startups' record £2 billion of investment as more investors than ever look to balance their portfolio with positive impact as well as positive returns.
Data published by Dealroom for the UK’s Digital Economy has revealed impact tech startups (early stage tech companies founded to build solutions to the United Nations Sustainable Development Goals) raised £2 billion of investment in 2021, up from £1.7 billion the year before and marking a 127% increase in UK impact investment since 2018.
With impact investing as a whole becoming more accessible than ever to the UK’s private investors - in part through the continued growth of tax efficient investment schemes - the prospect of “doing well by doing good” has never been more attainable.
ESG investing: a rising demand
Following a year in which much of the globe have relied on innovative technology to provide answers to some of the world’s most pressing environmental, social and governmental problems, the UK has prevailed as one of the world’s leading tech hubs, attracting a record £29.4 billion of total investment into the sector, £2 billion of which was directly impact-driven.
From investment into companies like Benevolent AI at the cutting edge of vaccine research, to digital-first banks like Atom Bank who have provided crucial CBILs loans to SMEs, and even innovative ordering platforms like QikServe that helped to keep the hospitality sector afloat during the pandemic, the past few years have seen UK impact investments play key roles in the survival and development of a number of vital sectors.
With almost 900 impact startups and scaleups now operating throughout the UK, these companies are currently worth a combined £50 billion and have created over 35,000 jobs across Britain.
It isn’t just the broad opportunity for delivering positive social impact that has seen the demand for ESG investing rise across the globe in recent years though, the growing potential to make profitable investments whilst aligning with one’s investment goals has also proved a key factor.
According to financial services group PNB Paribas, over the past five years sustainable equity indices have outperformed standard benchmark stock indices, with the MSCI world SRI (socially responsible investing) having seen a 14.1% compound annual growth rate (CAGR) in returns since the beginning of 2016, 1.1% more than the MSCI world standard benchmark.
Adding further substance to the idea that investments centred around positive long-term impacts can be just as (if not more) financially lucrative than those that don’t, such emerging figures have further propelled the growth of ESG investing across Britain in recent years, with a 2021 BML study finding that a quarter of UK investors plan to make an ESG investment by 2025.
The stock market hasn’t been the only asset type to have witnessed a significant growth in the value of ESG investments over the past decade though - impact-driven venture capital deals have become increasingly valuable among the UK’s experienced investors especially, in part due to the generous tax reliefs they can unlock.
The growing link to tax efficient investing
Impact investing into high growth startups and scaleups has long been one of the most popular routes experienced investors have chosen when balancing their portfolio to include ESG, with perhaps the most popular method of doing so being via the UK’s Enterprise Investment Scheme (EIS), having raised over £24 billion for more than 33,000 UK-based early-stage companies to date.
A government-backed scheme that facilitates investment from private investors into promising startups in exchange for an equity stake and host of generous tax reliefs, the EIS offers special incentives for investors investing into knowledge intensive companies (KICs), including double the maximum investment (£1 million) and twice the maximum number of staff (250) a non-KIC company can have to still be eligible for the EIS.
Such added advantages of investing into an impact-driven KIC via the EIS not only benefit the startup with a more accessible stream of funding, but provides the investor with a greater scope of choice and quite often a higher degree of security when investing.
This ability for investors to diversify their portfolio to include a greater level ESG easily and accessibly via the EIS - alongside the scheme’s considerably generous tax reliefs - has played a key role in its growth in popularity throughout the years. Last year was no exception, with 2021 registering over £1.9 billion of investment into 4,215 companies via the scheme.
Following a record year of impact investing that saw more than £2 billion invested into impact startups, the number of UK impact unicorns rise to 12, and the count of high growth futurecorns climb to 22, Britain’s growing demand for ESG investing shows no sign of slowing down, with the EIS forecasted to continue to be one of the key channels of achieving it.
Incorporating impact investments into your portfolio
Regardless of your preferred sector to invest in, or the level of risk targeted when incorporating ESG into your portfolio, a broad range of impact investment opportunities exist in the UK today to suit a variety of investor appetites.
Whereas for investors keen to focus on more directly cause-driven impact investments with potentially lower target growth, routes such as fixed rate green bonds may be an attractive option, for experienced investors looking to target higher potential growth whilst still supporting knowledge-intensive purposes, EIS investments into the rapidly growing tech sector may be more suitable.
Though as with every investment, impact investments can carry risks, now more than ever the opportunity for private investors to “do well by doing good” is very much attainable, and - in 2022 - has reinforced the scope for investors, SMEs and wider communities to benefit simultaneously from the innovations that are transforming the way industry and society operate.
Whether your stance on impact investing is that of a speculative one, or you have already long embraced the personal, financial and societal benefits impact investing can bring, one thing is for certain: the UK’s demand for ESG investing is growing, and as private investors once again turn toward the lucrative tech sector for answers in 2022, impact investing shows no sign of losing pace.