James Lawson of Tribe Impact Capital highlights some of the reasons why investing for good can ensure that clients’ values are appropriately reflected in their investment portfolio – and how doing well can happen by doing good
As a concept, responsible investing has been around for over a hundred years. Today it’s estimated to account for over a quarter of all managed assets (Global Sustainable Investment Alliance 2018). But how many advisers have had conversations about responsible investing with their clients?
Where’s The Demand Coming From?
There’s a groundswell in interest in the broad field of responsible investing. Research has shown that 56% of investors want to explore impact and sustainable investing (Barclays 2018). Demand is being driven by a general shift in attitudes towards greater transparency and accountability, but also by female and younger investors in particular.
This is a challenge for advisers, many of whom often still bundle these concepts and terms together with “ethical investing”. Yet clients now see a distinction between them. In fact, 62% of investors aged between 30 and 39 know the difference between ethical and impact investing (Barclays 2018). And our research has shown that interest in “impact investing” is fifteen times larger than “ethical investing” (Tribe 2018).
What Do We Mean By Responsible, Ethical, ESG And Impact Investing?
The broad field of responsible investing started with the mandates given by faith-based institutions including the Methodists and Quakers. They instructed their congregation to do no harm – both in their daily activities and with their savings. “Avoiding harm” meant screening out controversial activities like alcohol and tobacco. This practice of screening out – or negative screening – remains the principle behind ethical and faith-based investing as we know it today.
By the 1970s, many investors began to look at how businesses were behaving. Were they fully aware of the risks in running their businesses, such as controversial tax avoidance schemes, leadership structures that look too cosy, or wasteful and polluting manufacturing processes?
Investors realised that by including these considerations into their decision-making they were, in fact, looking at a proxy for well-run businesses. Over time these potential indicators were grouped into three headings: Environmental, Social and Governance – which gave us ESG investing.
The most recent development is impact investing. So rather than concentrating just on the practices and policies that determine how a business operates, we’re interested in what the business actually does.
Impact investing looks at the total footprint of an organisation, particularly whether they’re set up to solve a major issue like healthcare, education, financial inclusion, resource efficiency, environmental degradation or gender equality.
At Tribe, we believe these types of businesses are future-fit. These are the types of businesses that we believe are going to be around for the next few years; not those that are buffeted by pollution taxes, consumer activism, environmental regulations, resource scarcity, political influence, etc. In fact, our investment philosophy is based on picking the best elements from the evolution of responsible investing. We want to find businesses that avoid controversial practices; are well run, minimising environmental, social and economic risks, and are creating commercial opportunities aligned to social and environmental needs.We’re looking to make investments which do good for investors, people and the planet.
What About Returns?
There are a wide number of studies that show the same thing: sustainable investing can lead to the same, or better, financial outcomes as traditional investing. One study of over 10,000 funds found that sustainable equity funds had higher or average returns with equal or lower volatility (Morgan Stanley 2015). In fact, a review of over 200 studies found that “sustainability does pay off for companies and investors” (Oxford University 2016).
What About Risk?
Running sustainable portfolios is not without risk. In addition to the investment risks that any portfolio has, sustainable investors also want to scrutinise investment managers and expect transparency. That’s why Tribe is a dedicated impact wealth manager – we only run portfolios for impact. We’re also a B Corporation, signalling our belief and commitment that business should be a force for good. We’ve also teamed up with Fairstone to offer our Model Portfolio Service to their advisory network.
Where Do I Start?
Our advice to the IFA community is simple: do what you do best, talk to your clients. You know them well but may have historically framed the conversation about “ethics” and what they’d like to avoid. Instead, try to move the conversation away from avoidance to solutions with one further question: “why?” Once you’ve understood what motivates your clients’ desire to avoid heavy polluters, tobacco, weapons, alcohol, or other controversies, you can guide the conversation away from these problems to potential answers: better education, more efficient resource use, improved healthcare, ecological protection, etc. What challenges do we face as a planet, how can we solve them, and how can my portfolio help to deliver this? Asking questions like these means that “knowing your client” becomes a much deeper and more values-based process – a sound basis for developing long term client relationships based on trust.
For more information visit www.tribeimpactcapital.com
About James Lawson
James is a co-Founder and Partner at Tribe Impact apital, the UK’s first dedicated impact wealth manager. Tribe builds portfolios for wealth holders to align their financial requirements with their individual values and the impact they want to create. Tribe is a B Corporation, as well as signatory to the UN PRI, UN Environmental Programme Finance Initiative, and HM Treasury’s Women in Finance. In 2018 Tribe was elected “Best for the World” (representing the top 10% of B Corps g lobally) and won PAM’s Innovation Award and WealthBriefing’s European Specialist Investment Manager Award. James started his financial career at UBS Wealth Management in London and Switzerland. He then founded the global wealth insight consultancy, Ledbury Research. He has a Masters in Economics and holds the CFA designation.