Chief Executive, UK Sustainable Investment and Finance Association
Impact investment, which can be defined as an investment where providing some kind of benefit – usually social or environmental – is a core purpose of the whole activity, is well to the fore.
I would point to two linked drivers, investor demand and regulation. In terms of demand, UKSIF members of all types point to increasing interest from savers in what is being done with their money. This demand may be ‘values’ led, for instance an individual or charity wanting to know that their money is not being invested in areas they object too – perhaps animal testing, or in controversial regimes, or it may be ‘value’ led. Value-led investors recognise that, sometimes in the short-term, and certainly in the long-term, companies that behave badly in terms of polluting, abusing stakeholders or abusing tax legislation are likely to be penalised either by governments or by customers with a consequent loss of value. Short-term examples would be what happened to the share prices of companies like Sports Direct and Volkswagen where poor corporate behaviour resulted in sharp share price falls.
Assessing and looking for ‘impact’ is going to be a feature of UK savings going forward.
Long term, value-led investment
One of the big, long-term issues in value-led responsible investing is what value will be lost as the world economy weans itself off burning carbon. Put simply, if we are to limit global warming we can’t burn all the fossil fuels owned by the fuel companies, with credible estimates from the Carbon Tracker Initiative suggesting that more than 60% will have to remain in the ground. That represents a tremendous long-term risk to savings, and the responsible and impact investing experts are now looking at the implications.
The reason value-led demand is so important is that people are recognising that the number of issues is enormous, and an entirely different investing approach is needed to address them, one that is long-term, and which monitors non-financial matters to a much greater degree than is normal. Issues that are currently receiving attention include diversity, water, the rights of indigenous peoples and many more.
Savers need clear regulations to protect their investment
What we are seeing now is the demand being paralleled in regulation. In the UK, work over recent years by the Law Commission, supported by UKSIF and others, has persuaded the government that, since there is a clear risk to savers’ money from the value-led issues, regulation needs to make providers consider them. In early September the government changed the regulations governing trust-based pension schemes to require them to have a policy on how they consider financially material factors such as environmental, social, and governance factors, and they specifically include climate change. UKSIF will now be working to get this thinking applied more widely in UK financial services.
It’s all beginning to change
Against this background, we are seeing new investment opportunities and behaviours developing, which is where ‘impact’ features. Fund managers and some pension funds are now beginning to use disclosure on the impact of the companies into which they invest in order to differentiate themselves. The various parties are using initiatives like the UN Sustainable Development Goals and the recommendations of the Task Force on climate-related disclosures to frame this work, and there is no doubt that it has momentum. The trend is spreading to financial products aimed at individual savers as well with products explicitly focusing on impact increasingly available; these products, by linking areas of concern to finance, may well appeal to both value and values-driven investors.
So, it is all coming together: public interest is driving demand and regulation is helping. Assessing and looking for ‘impact’ is going to be a feature of UK savings going forward.