Industry Insights

Fact: impact-driven investments can deliver long term returns

All the arguments in favour of socially responsible or impact investing are really ethical based and not financial, right?

Wrong. In fact, that couldn’t be more wrong.

A recent article by Mark Haefele, chief investment officer of UBS global wealth management, finally nails the old myth that investors must sacrifice returns for sustainable and impact investing (SII).

He argues that the old critics of SII were attacking a “straw man’’ argument, contrasting regular or traditional investing with “exclusion” investing or the exclusion of ethically questionable investments.

For example, the Norwegian state pension fund calculates it has sacrificed 1.9 percentage points of return over the past decade by excluding arms manufacturers, coal producers and other businesses with ethical 'issues'.

However, exclusion investing is an outdated approach to SII. It’s no longer about avoiding certain activities. Impact investing has been added to the mix, so it isn't just a question of not supporting bad things, but of backing good things.

Impact investments are made in businesses or projects that have a positive social or environmental impact, which could, for example, be providing clean water, clean energy, life saving drugs or education. They might also be in traditional areas such as housebuilding, which revitalises communities and provides jobs, training and much needed new homes.

When impact investments are added to the definition of SII, the returns available to the investor begin to look far more attractive. In fact, there is increasing evidence that sustainable and impact investors can at least match, if not beat, the returns of ordinary investors.

Making an impact - and a profit

Haefele points to more than 2,200 academic studies over the past 40 years which have analysed the relationship between environmental, social and governance (ESG) factors and corporate financial performance. According to a meta-study by Friede & Busch, more than 90% of them have found that ESG factors have a positive or neutral impact on financial returns. It says:

The results show that the business case for ESG investing is empirically very well founded.

And since 1990, the MSCI KLD 400 Social index, of companies with strong sustainability profiles, has outperformed the S&P 500, with annualised returns of 11.2% against 10.7%.

The studies quoted by Haefele are borne out by a growing body of other evidence.

For instance, there was the survey by the Global Impact Investing Network (GIIN) and JPMorgan, which found that 55% of impact investment opportunities result in competitive, market rate returns.

Add to that a new study from Moneyfacts which looked at the performance of ethical funds compared to their mainstream peers over four different time frames and in five different categories or sets of fund. It found that ethical funds outperformed comparable mainstream funds in 13 of the 20 scenarios surveyed.

Read more: impact investing: targeting a financial return and making a real difference

Over the past year, ethical funds have performed better than their traditional counterparts, posting an average growth of 16.8% compared with 15.2% from the average non-ethical fund.

The average ethical fund (30.4%) has also beaten the average non-ethical fund (29.1%) over three years. However, it’s over five years that ethical funds have really excelled, with the average ethical fund returning 76.1%, compared to an average non-ethical fund return of 64.1%.

This indicates that impact driven and SII investments are particularly suitable for investors who are looking for long term returns.

The reasons for this are not complicated.

  • These are businesses which are in it for the long term and so plan to build operations which are stable and sustainable
  • If they are making an impact, then, by definition, they’re addressing a proven market need and usually one which isn’t adequately being met by other providers
  • They exist to improve lives and increase social good and this leads to satisfied customers - and satisfied customers mean a strong and positive brand image, with investors, employees and customers being enthusiastic brand ambassadors
  • They can attract talented individuals who don’t want to work for employers who only care about the bottom line
  • As Haefele argues, such companies are typically less exposed to risks — such as environmental accidents or punishment from regulators
  • High ESG standards can function as a guide to a company’s overall quality of management and long-term sustainability

It’s not surprising then that impact investments and SII investments are proving increasingly popular and have now gone mainstream.

Impact investment popularity is rocketing

Leading investment bank JP Morgan forecasts that the impact investment market will be worth some US$1trn in about two and a half years. Research by ethical bank Triodos shows the socially responsible investing (SRI) market now accounts for £16bn in assets under management in the UK market. According to research by the EIRIS foundation, in 2007, investment in UK green and ethical retail funds was about £8.9bn - and by October 2017 this figure had nearly doubled to just over £16bn, agreeing with Triodos’ estimate.

What's more, last summer, insurance giant Swiss Re announced it was moving its entire US$130bn investment portfolio to new, ethically-based benchmark indices.

Chief investment officer Guido Fuerer told Reuters:

“This is not only about doing good, we have done it because it makes economic sense. Equities and fixed income products from companies and sectors with a high ESG [social and governance] ratings have better risk-return ratios.”

According to a UBS Investor Watch survey of wealthy investors globally, 39% say they already have some sustainable investments in their portfolios. Again, this is only likely to increase, and in a white paper Mobilizing Private Wealth for Public Good, UBS points out that globally, over the next 20 years, some 460 billionaires will be leaving US$2.1trn to their heirs and impact investing is especially popular with millennials.

Read more: 3 key reasons impact investing is soaring in popularity

As the world becomes wealthier and ever more connected and aware of the challenges it faces, people are willing to spend more on making the planet a better place for themselves and for their children. SII and impact investing give everybody – and not just the children of billionaires - a way to tap into this long-term trend. And they can do so in a way which protects their savings, making money while making a difference.

As Haefele says:

“While there is already ample evidence that it does not hurt your portfolio, it is becoming increasingly clear that it can actually help boost your long-term returns.’’
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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.