With the increasing global attention on SRI and impact investing, there has been a lot of debate and research on whether this style of investment can generate competitive returns against market benchmarks or whether it will lead to concessionary returns. While it is clear that competitive returns are achievable in the SRI space, the picture for impact investments is more diverse. An increasing number of studies and evidence show that market-based returns can be achieved with impact investing (e.g., the recent collaboration between Cambridge Associates and Global Impact Investment Network (“GIIN”); collaboration between Financial Times and UBS Global Asset Management, and the Wharton Social Impact Initiative¹). However, there is also rising concern and debate among field practitioners about the assumptions behind these reports, and whether they may result in potential misperceptions on return expectations.
While we recognize these discussions may be part of the sector’s healthy development, we also believe that it is difficult to make such generalizations since the definition of risk-adjusted returns can be rather subjective, and varies depending on the investor’s impact objectives. Furthermore, given the wide spectrum of capital across various asset classes, the framework of these discussions needs to be properly defined and understood for a meaningful discussion.
Ultimately, we believe financial returns should be considered holistically, along with extra-financial returns generated, to meet individual needs and specific circumstances. For RS Group, the SRI and TI parts of the portfolio are combined to maintain overall portfolio diversification and generate the financial returns needed on an annual basis to support Annie and her family’s personal needs, as well as to cover RS Group’s activities (annual grant-giving and advocacy) and operating costs. The target return is set and reviewed on an annual basis and outlined in the Total Portfolio Policy Statement as discussed in Our Portfolio – Our Total Portfolio Policy Statement.
To date, the financial performance of RS Group’s investment portfolio has fully met our targeted returns and expectations. Overall, the 5-year average performance was 5.0% p.a. (net) compared to 5.2% p.a. of the custom benchmark. (See figure below)
In spite of the portfolio being “under construction” for at least the first two years of its lifetime, we managed to achieve financial returns that are largely comparable to a traditional (portfolio weighted) benchmark. The 5.5 yr average annual portfolio return was 5.0%, compared to 5.2% of the portfolio weighted benchmark. In certain years the RS Group portfolio outperformed, in others it underperformed the benchmark. To a great extent these fluctuations are due to the special characteristics of our portfolio: a slight tilt towards growth-oriented companies and mid-caps, a relatively strong overweight in emerging markets, and a strong underweight of commodity and (fossil fuel) energy sectors. All of these factors contributed to the portfolio working better in certain years than in others.
RS Group’s performance is mainly the result of our decisions regarding investment strategy (see section 2.3.3) and of the stock-picking decisions of our fund managers. We decided not to use short-term tactical allocation as a source of performance, because this is in line with our long-term investment horizon. To provide some insight into the performance of the single funds, we show annual average performances of select equities and fixed income funds in our portfolio per end of December 2015 (see Figures A and B.). While some funds outperformed the benchmark, others were in line with it or underperformed. This is a rather superficial view, though, because of the limited time period and because each fund would have to be compared with a more specific benchmark. Taking into account its risk profile and contribution to diversification, all funds play an important role in the context of the total portfolio.
Source: All calculations based on data from fact sheets provided by fund managers
We have captured the target impact part of our portfolio based on a variety of metric measurement frameworks that are readily available and reported by our investees on an overall portfolio level and by asset class. We hope this approach, albeit fragmented, is a start to give ourselves and our readers a sense of the non-financial impact of the portfolio.
Impact from Private Equity and Debt Funds
From 2010 onwards, RS Group allocated capital into 5 Private Equity Funds (all of which are Targeted Impact in nature), which in turn invested in 42 underlying companies (including 6 certified B Corps) working to create impact across 11 industries. RS Group also allocated capital into two Development Finance Funds, which at December 2014 were invested in ~95 fair trade oriented institutions, and ~80 microfinance institutions.
In spite of the wide range of industries, we found a set of common impact indicators that transects a majority of these companies’ operations and RS Group’s mission. Working directly with the fund managers, and supplemented by B Lab’s B Analytics platform, we have selected 8 IRIS indicators that we deem material, and compiled the total impact generated by 4 of our 5 Private Equity Funds and 2 Debt Investments, as referred to above. The total impact generated by these funds is illustrated in Figure C.
Impact from Listed Equity
Active Ownership on Company Performance and Behavior
RS Group requires all of its investment managers to engage with their underlying portfolio companies on ESG issues through regular dialogue and active proxy voting.
On an annual basis, we discuss and understand the types of engagement our investment managers had with investee companies. Given the wide range of ESG issues involved, the result of these dialogues ranges from “successful” to “partially successful” to “unsuccessful.” In instances where there is limited willingness of management to address material ESG issues raised, investment managers have sometimes chosen to divest from the company. On the other hand, there have been times when investment managers have pooled efforts with other investors to press on certain topics which were well-received by management.
A Smaller Carbon Footprint
The carbon footprint of RS Group’s listed equities portfolio is 60% less carbon intensive than that of the benchmark (MSCI ACWI), (approx. 136 tonnes of CO2e per USD 1 million vs. 341 tonnes of CO2e per USD 1 million invested), as illustrated in the figure below.
The low carbon intensity (relative to benchmark) of the portfolio is partially due to our sustainable screen, which resulted in investment managers favoring companies in the Energy Efficiency / Alternative Energy, Sustainable Food and Agriculture, and Resource Efficiency sectors. Furthermore, our listed equities portfolio has very limited oil and gas sector exposure (due to our divestment policy), which tends to be carbon intensive. (Please refer to “Impact Story #3: Incorporating a Climate Change Lens in 2013” for more details.)
Stronger ESG Performance
The ESG scoring of the underlying companies within the listed equity portfolio is higher than that of the benchmark (MSCI ACWI), (approx. 63.3 vs. 49.4 (see figure below)). In arriving at this score, Sustainalytics, our data provider, has taken into account the Environmental, Social and Governance factors of each underlying company.
¹Great Expectations: Mission Preservation and Financial Performance in Impact Investing, Wharton Social Impact Initiative, October 2015