If you are feeling disillusioned with modern capitalism and would like to influence how corporations behave there are, essentially, four ways in which you can make a difference:
- Vote for political representatives who will create and maintain adequate regulatory environments and boundaries for companies to operate within.
- Vote with your wallet and consume only products and services that do not have unmitigated negative impacts on the environment or society.
- Control the flow of your excess capital through the banking system to fund only companies who behave appropriately.
- Invest only in companies that have positive impact and avoid investing in companies that have negative impact.
The influence of voting decisions and consumer choice is well understood, but investment is probably the most overlooked method of influencing a firm and may have the potential to be the most powerful.
Each time an investor decides to buy a share in a company, she is deciding to provide capital to that company. Companies thrive when their ‘access to capital’ is unconstrained and boards often focus more on this than anything else. From their perspective, while politicians are a nuisance and customers a necessary evil, capital is the king that can make their day.
In a wider context, every company has an impact on its stakeholders and surroundings. Some can be large. Most people are aware of the negative impacts. Large companies use significant chunks of the world’s natural resources and create massive amounts of waste. They use ‘tax minimisation strategies’, mislead their stakeholders with disingenuous PR, and use their capital to sway political processes in their favour. Companies that have a negative impact on society and the environment also create long-term legal, regulatory and financial risk for themselves, their shareholders, employees, partners, neighbours and others.
But companies can act as tremendous forces for good. They employ tens of millions of people, buy billions of dollars of local produce and provide basic services for the poorest people on the planet. They build infrastructure and develop innovative solutions that have the world-changing potential that we so desperately need. This potentially positive impact of large companies materialises only with flows of capital, which are influenced by each investment decision. These decisions may have a small impact individually but, when many investors act together, great changes can be achieved.
In recent times, many fund managers have ‘branded’ their funds as responsible, sustainable or ethical, without much external assessment or oversight. This has led to confusion amongst investors and a lack of consistency across peer groups. Impact-Cubed recently conducted an internal assessment of the ‘impact’ of 30 well known sustainable portfolios in UK using a proprietary methodology based on publicly available environment, social and governance data. Disturbingly, for the three poorest performers, the ‘impact’ score was actually negative. About 60% showed quite dismal results. Only ten funds were really delivering the impact they promise in their marketing.
In order for your own investments to have a more positive impact, we recommend focusing on three simple things:
- Consider the current impact of your investments.
The way you invest your wealth and assets that you control impacts the flow of capital to companies. Your long-term investment plan will not only influence the risk and return of your portfolio but your decisions impact on the wider stakeholder group affected by these companies.
- Ask your wealth manager to measure the impact of your portfolio
Look at your existing portfolio of funds and listed equities. Is it aligned to your view of the world? Are you knowledgeable of and comfortable with the impact it has? Do you feel sufficiently compensated for the additional risk that negative impact potentially has if you own companies which may be causing harm, such as tobacco or fast food companies? Could you perhaps set some targets together with your wealth manager to ensure you reduce that risk over time?
- Adjust accordingly
If you decided to reduce ‘sustainability’ risk in your current portfolio and it is not sufficiently aligned, some positions in your portfolio may need to be adjusted. While this might seem difficult and tiresome, after the adjustment you can rest assured. It is possible that you will have ‘future-proofed’ your investments’ risk and return. Furthermore, you did the right thing. Every investment decision towards positive impact makes the world a better place, even when you are seeking returns through listed equities and funds alone.
Guest contributors Larry Abele, Arleta Majoch and Antti Savilaakso are hedge fund managers who have been investing with impact for over 10 years. They recently launched an Investment Impact Measurement tool, Impact-Cubed, which enables investors to measure and manage the impact of their investment portfolios. An account manager can use the tool to help you understand the role of impact in your investment portfolio and to set targets for the future, if you desire. Details of costs can be found out on request.
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