Strategic Insights | Investing for Positive Change

Strategic Insights | Investing for Positive Change

Climate Change
Published November 16, 2020

The state of the world

One of the themes to which we return on a regular basis in our Strategic Insights is – quite simply – the state of the world in which we live. It is quite possible that this period at the start of the 21st century will come to be viewed as a watershed moment. For the first time, there is widespread awareness of the damage that our established practices and processes are doing to the environment. And for the first time, we have understood that this is quite possibly our last opportunity to do something about it.
It is now generally acknowledged that we need to find ways of marrying up human development goals while simultaneously sustaining our planet’s ability to provide the natural resources and ecosystem services on which the economy depends. We need to find ways of meeting our present needs, but without compromising the ability of future generations to meet theirs. That’s basically what sustainable development is all about.

Sustainable development

The modern concept of sustainable development is derived mostly from the 1987 Brundtland Report. And a number of key global agreements and international bodies – such as the Paris Agreement, Agenda 2030, the Kyoto Protocol and the Intergovernmental Panel on Climate Change – have emerged (directly or indirectly) from it, all designed to bring about change: change that is positive and based on sustainability.
But we don’t need to be Elon Musk or David Attenborough… or even Jamie Oliver or Marcus Rashford to drive change. As investors, we have considerable leverage when it comes to making the world a better place.

Impact investing

We can invest for positive change. Positive investing – or impact investing – involves investing in companies, organisations and funds in such a way as to generate a measurable, beneficial social or environmental impact… alongside a financial return.
Investment Quorum’s investment team is relentlessly focused on unearthing exciting investment opportunities that will generate decent returns. But as a wealth management firm with a social conscience, we find ourselves increasingly interested in funds which also contribute to an inclusive and more sustainable world.
“We all want decent returns – that’s a given”, says IQ’s Chief Investment Officer Peter Lowman. “But investing for positive change is about analysing and reporting impact, and providing capital to address social and environmental issues”.
An oft-cited example of a sector that is seen as increasingly out of step with the modern world is fashion. You need nearly 3000 litres of water to make a white T-shirt that you will probably throw out after wearing it just a handful of times. And the global textile industry generates more harmful emissions than shipping and aviation combined. So our relationship with the clothes we wear needs to change significantly if the sector is to become sustainable.

Returns… but not just returns

Peter and his investment team look for funds that attach importance to four themes: social inclusion and education; the environment and natural resources; healthcare and quality-of-life; and addressing the needs of the world’s poorest populations – the people on the bottom rung of the global wealth ladder.
To measure positive impact, you need processes and systems that can be applied uniformly across a plethora of different companies. But not all positive change is easy to quantify. It might not be straightforward to put a figure on improving access to information, for example, but doing so is just as important as calculating the carbon emissions resulting from an industrial process or its energy efficiency. People who embrace impact investing are committed to creating real change, and being able to demonstrate that such change is actually achievable is key to getting even more people to invest positively.
The positive change funds that Peter and his team look at will aim to outperform various world indices by at least 2% per annum… while at the same time contributing towards a more sustainable and inclusive world. The investment analysts working for such funds are usually bang on the money when it comes to predicting some of today’s superstars – like Amazon and Tesla. It’s their job to identify the success stories of tomorrow, and doing so can take months or even years.
One positive change fund – Baillie Gifford’s – features some curious omissions among its portfolios. Solar power, for example, has incontrovertible benefits from an environmental perspective. But to date, no one company has emerged with enough of a competitive edge, capable of delivering sustainable returns for investors. So it is not represented in the fund.
“Such funds”, says Peter “are made up of businesses that have the potential to double over the next five to ten years, with significant opportunities thereafter”. The companies within them are assessed on the basis of their products, their business practices and their determination to bring about positive change.

Measuring positive impact

An array of processes, platforms and ratings systems have been put in place for gauging the impact of such companies annually. They feature analyses of the resources they use, their activities and outputs, as well as the short-term and longer-term impacts that they have on society. Baillie Gifford, for example, makes extensive use of the UN’s Sustainable Department Goals as a common framework.
In healthcare, San Diego-based DexCom has revolutionised life for diabetics by developing continuous monitoring solutions. Over a series of patented innovations, it has demonstrated its deeply-rooted commitment to creating positive change. Its continuing research and development, together with its efforts to make its products more widely accessible prove that its commitment goes well beyond its mission statement: it really is serious about changing the world.
With its charismatic and somewhat unpredictable CEO, Tesla may be something of a “Marmite” company (it has a tendency to polarise people), but if it is in the fund, it is because it is not just committed to making greener cars: it invests to make them cheaper, undertakes research into electricity storage technologies and has opened up its patents to serve the wider industry. Meanwhile, Alphabet may have a score of zero for its business practices, but as a powerful equalising force on the Internet, it includes in its purpose statement a commitment to improve the lives of millions of people.
And at IQ, we do not shy away from putting our money where our conviction lies: in addition to managing your wealth through impact investing, we support laudable and worthwhile causes where we can – in line with our belief that businesses such as ours should be responsible and contribute in a meaningful way to the communities in which they operate. And we are also on our way to being awarded B Corp certification in recognition of our social and environmental performance.
We believe that investing – beyond safeguarding our clients’ futures – should give them a sense of making a difference. We want to do more than just help people invest: we want to help them channel capital in a responsible way towards companies that are going to innovate and address global challenges with a view to creating a more sustainable world. That is what impact investing – investing for positive change – is all about.