What we are doing and advocating at RS Group is by no means new or even unique.
Investing to generate financial returns with positive social and environmental impact has been given a variety of tags over the years, from socially responsible investing (“SRI”) and ethical investing to more recently calling it sustainable investing and impact investing. Regardless of the terminology, people around the world have sought to bring values and purpose to the act of investing.
Over recent years, increasing numbers of investors have come to understand that philanthropy on its own cannot sufficiently address — to say nothing of overcoming — our world’s problems. Bill Gates recently acknowledged that not only is he using his funds to make grants to non-profits, he has also set aside US$1 billion for program-related investments, as well as a portion of his personal wealth for targeted impact investment strategy¹. Many others have taken seriously the view that investment activities can be just as impactful as philanthropy in contributing to the world according to their values and purpose.
According to the World Economic Forum’s December 2014 report, over US$13.5 trillion in assets under management by wealthy individuals, family offices, and pension funds have been invested in accordance with socially responsible values². Even if one adopts a more restrictive definition of the term impact investing to include only capital invested to generate financial returns that consider social and environmental impact, some would be surprised to learn that one in six investment dollars in the United States is invested on an impact and sustainability basis³. Since the launch of the Principles for Responsible Investing in 2006, assets under management by signatories have grown from US$4 trillion to US$59 trillion¯ as of April 2015.
Mainstream investors are also beginning to pick up on this trend, with a growing segment of wealth management firms now integrating SRI or ESG practices to manage investments in public equities and fixed income. In October 2015, the U.S. Department of Labor released a new guidance for the Employee Retirement Income Security Act (ERISA), a federal law setting standards for private pension and health plans, giving explicit permission to invest in businesses that have adopted ESG best practices‾. In 2014, UK’s Law Commission released a report titled “Fiduciary Duties of Investment Intermediaries”, which confirms the incorporation of assessments for long-term risks, including ESG impacts, is a part of fiduciary duty for UK trustees¨. The new guidance sends a powerful market signal to all institutional investors that as fiduciaries, they can widen the aperture of their lens to pursue investment strategies that consider ESG best practices.
During the same month, the world’s largest money manager, BlackRock, joined other financial big names such as Bain Capital, Zurich and AXA in launching impact-themed products by announcing its first impact-labeled US mutual fundˆ.
Meanwhile, others have brought to market specifically branded “impact investing initiatives” which offer clients opportunities for direct and fund investing in strategies that seek to create community level impact as well as generate financial return for investors. Even Goldman Sachs Asset Management entered the game with its July 2015 acquisition of impact investing advisory firm Imprint Capital.
The mistaken perception that financial returns must be sacrificed for social impact is also being overturned. In a 2011 paper, financial economists Lobe and Walkshäusl contrasted the performance of a portfolio of “sin stocks” with a portfolio of “virtuous stocks”, and found no compelling evidence of unethical screens having a negative impact on financial returns˜. In addition, recent research from UBS Global Asset Management summarized an outperformance of SRI indices over standard market weighted parent indices when tracked over the past five years°. SRI indexes such as the MSCI Europe and Middle East for instance marked the highest returns of 10.2 percent versus 7.4 percent on the main index, as of December 2015.
As institutional investors begin to adopt impact investing, products and options have opened up for retail investors who would like to incorporate their values into their investments. Social ratings and indices from providers like MSCI, FTSE and Sustainalytics make it easier for investors to pick stocks according to their personal values. In addition, organizations such as Divest/Invest and As You Sow also provide impact conscious capital owners of all sizes with information and tools on more thoughtful management of their capital.
Finally, with the advent of the digital age, barriers to active shareholder engagement have also been virtually eliminated. It is now very easy for investors to attend, vote, and voice their concerns in accordance with their values at the AGMs / EGMs of their invested companies. There has also been an increase in the number of shareholder engagement activities from individual investors, asset managers, and shareholder engagement and advocacy groups who understand the importance of active shareholder engagement to the overall ESG and financial performance of companies.
Despite encouraging global trends, we note these positive developments have limited reach in Asia. This has been a challenge for us since we began to build our portfolio five years ago. The local ecosystem is relatively underdeveloped, and there is a lack of people and organizations interested in this approach.
Nevertheless, we firmly believe this is the future, and eventually the growing trend of incorporating impact considerations into the investment process will reach these shores. The challenge is to find ways to accelerate this process — we cannot afford to sit on our hands and wait.
²Impact Investing: A Primer for Family O ces, World Economic Forum, December 2014
³2014 Global Sustainable Investment Review, Global Sustainable Investment Alliance, 2014
¨The Law Commission, Fiduciary Duties of Investment Intermediaries, July 2014, Summary
˜Vice vs. Virtue Investing Around the World, Lobe, Sebastian and Walkshäusl, Christian, May 2011