Investing is all about putting your capital to work so that it generates attractive financial returns, but there is a growing recognition that doing well from your investments doesn’t preclude doing good through them also.
What is known as impact or positive investing is rapidly gaining currency with all kinds of investors in the UK, who are coming to realise that financial and social/environmental gains can often go hand in hand.
In essence, impact investing is about investing in organisations whose core activities are geared towards positive change, and where helping society or the environment is at the heart of their revenue model.
One example might be an eco-car manufacturer which could act to slash road emissions while also selling lots of vehicles; another might be a manufacturer of basic mobile phones which helps to bring telecommunications to people in developing countries where there is little landline cabling. It is easy to see how these business activities can generate solid profits while also making a wide-reaching positive impact.
The merits of positive investing have not escaped UK investors and it seems that take-up will grow and grow. New research shows that at present almost 60% of affluent over-40s have allocated a portion of their investment portfolio to socially-conscious investing[i], while for under-40s this figure rockets up to nearly 80%. And nor are these small allocations: on average, younger individuals are putting around a third of their money into investments which do good and older ones a fifth.
Impact investing is the latest offshoot from a whole branch of investing where ethics and a desire to help rather than harm society and the planet are prioritised. At one end of the spectrum is ethical investing, which might mean screening out “sin stocks” like tobacco or arms manufacturers, or avoiding companies with poor pollution records. A step on from that is positively screening investments so as to look for companies which have a proven track record of taking their responsibilities to society and the environment seriously. With one more step – looking for investment opportunities where profit is indivisible from positive change – we arrive at the impact investing opportunities gaining in popularity today.
Big inflows already
The numbers speak for themselves: investors ploughed £13.5bn into green and ethical funds last year[ii] alone and it is estimated that a massive £233bn may have already been allocated to positive investing in the UK. When the first ethical investment funds were launched in the early 1980s many scoffed at their very existence, but attitudes are now radically different – to the point to which few would dismiss responsible investing out of hand and a significant proportion of wealth managers offer ethical portfolio overlays as a standard option. The assumption used to be that screening narrowed the available investment universe too much and hampered investment managers from generating good returns. This has been largely overtaken by the recognition that businesses which are committed to behaving well are often more sustainably profitable over the long term and can present less investment risk too. Think of the impact an environmental disaster or a child labour scandal can have on a company’s share price, not to mention massive fines which could be imposed, and the link between good corporate behaviour and good financial results is obvious.
Culturally, an overt sense of social conscience appears to be more and more pervasive today and people generally seem to be feeling far more empowered to actually do something about social ills themselves. While once people might have been content to salve their consciences with a charitable donation, now many want to put their personal capital to work for the common good every way they can. Investors of all levels of wealth are getting involved, as evidenced by the growth of micro-financing initiatives, where a saver in the UK might lend start-up capital to an aspiring farmer in a developing country.
Of course, micro-financing is unregulated and so tends to be approached as quasi philanthropy rather than a destination for serious amounts of investment capital. In contrast, the kind of impact investing the eco-car or mobile phone manufacturer represents could in every way represent a “proper” investment with good prospects for generating robust returns. It may be that an investor uses impact investing as an extension of their philanthropic efforts, but still with a real expectation of returns; or it may be that logically they don’t see the point in trying to help good causes with money they have designated for charitable giving on the one hand and then investing their capital in ways which undermine those very same aims and values on the other. Either way, this isn’t about giving money away.
Proponents of impact investing often say that it represents the proper use of private capital for public good and many believe that one day it could be become as commonplace an asset class as bonds. Indeed, one very eye-catching development has been the issuance of social or impact bonds, where a charity or other not-for-profit offers a modest coupon for a mid-term loan of development capital to help it achieve its objectives. In 2011 Scope, the disability charity, launched an award-winning £20m social impact bond issue, offering investors with £50,000 a coupon of 2-3% over three years at a time when bank interest rates were on the floor.
A tax relief for the cognoscenti
But there is one more reason that social or impact investing is set to really take off among savvy investors. Generous Enterprise Investment Scheme-style tax reliefs were extended to social investment at the start of the 2014/15 tax year, but this story has been eclipsed by discussions of the sweeping pension reforms announced in the last Budget. Many investors may therefore be unaware that they could claim 30% income tax relief on investments made into qualifying “social enterprises”, as well as Capital Gains Tax relief too.
Naturally, Social Investment Tax Relief is there for good reason. The government wants to reward investors for taking on a degree of extra risk with this type of investment and so it would hardly ever be advisable to put too large a chunk of your wealth into this type of vehicle (the upper annual limit is £1m a year). They could, however, be very useful from a tax-planning perspective or even as a bequest for after you are gone. Moreover, with sufficient due diligence on the investment’s structure and safety carried out by a professional wealth manager – and a properly diversified portfolio – you could keep risk to within quite comfortable bounds and see a decent return. Impact investments could be a useful addition for all kinds of investors.
While traditional investments might comprise the bulk of your portfolios, it can often pay to go through your options in some depth with an expert – particularly if tax mitigation is a priority. There may be options a wealth manager can tell you about that could save and make you a lot of money over the long term.
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[i] According to a January 2015 study from Charities Aid Foundation and Scorpio Partnership
[ii] According to EIRIS
