Impact Investing – The Longhurst way

Glyn Chetwynd – Technical Manager

The UK Sustainable Investment and Finance Society (UKSIF) defines Impact investing as “investments made with the intention to generate positive and easily measurable social and environmental impacts alongside a financial return”.

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Essentially, impact investing is a sub style of a wider and more broad-based ESG investment approach, which is focused on seeking to have a positive impact on society and the environment by intentionally harnessing corporations profit seeking goals.

“There is no doubt that the financial sector has an important role to play in helping the economy adapt to a more sustainable long-term future”.  “The Government’s policy direction has triggered policy and regulatory measures to green the financial system”. 

– Financial Conduct Authority (FCA)

ESG investment has grown substantially in the last 10 years, driven by consumer and institutional demand, and government policy. For example, the UK for example aims for a 78% Carbon emission reduction by 2035, with the UK ESG Funds holding has £12billion of assets under management – representing 38% of net sales in 2020.

At April 2022, of the 1,154 funds in the Morningstar Open Ended Fund data base (screen on oldest unit class and ESG investment approach), c.48% of these stated they had an ‘Impact’ investment theme.

However, with such a broad choice of investment opportunities available, what are the core Impact themes and how can the investor identify, select, and manage those firms that intend to make a positive social impact in their businesses, and do so successfully?

“The focus is also extending beyond climate. Nature and biodiversity are gaining attention. And social and governance issues are becoming more prominent – including recovery from the pandemic, and promoting diversity, inclusion, fair taxation and workers’ rights”. 

– Financial Conduct Authority (FCA)

At Longhurst we use the leading ESG research data base from (1) Morningstar, and (2) ESG research house Sustainalytics. They provide an Impact Metric Database, from which we can screen funds from.

The database has 5 key themes which span two social and three environmental areas, underpinned by a baseline theme of Leadership and Collaboration – which attempts to addresses the indirect impact business has by way of its leadership and contribution to collective efforts. Core themes are:

  • Climate Action: This theme is concerned with the global effort to curb the earth’s temperature rise and cope with unavoidable consequences. It includes measures to promote clean energy, limitations on greenhouse gas emissions, and climate change adaptation measures.
  • Healthy Ecosystems: This theme is concerned with the safeguarding of ecologically sound environments on land, air, and water. It does not include GHG emissions and water consumption as these are covered under other themes.
  • Resource Security: This theme is concerned with the contribution to resource security through efficient use and circular economies. Resources of concern include water, timber, metals, minerals, gases, and all types of manufactured materials.
  • Basic Needs: This theme is concerned with addressing the basic needs of humans and focuses particularly on lower-income individuals. Basic needs include providing access to food, housing, essential healthcare concerning major and neglected diseases, clean water, and energy for underserved populations. It also addresses human safety, including safe workplaces and
  • Human Development: This theme is concerned with enhancing human capabilities and promoting human progress. It includes measures that support education, improve equality, provide employment opportunities, and advance healthcare.

The list in not exhaustive, but it allows Longhurst to assess an investment portfolio’s holdings and calculate ESG impact metrics at the portfolio level to support informed decision making and reporting.

At present, Longhurst applies impact investing as an ESG tilt across all our ESG portfolios, alongside another secondary ESG theme ‘Engagement and Activism’ investing.

The investment actively engages with the underlying companies on non-financial issues, such as corporate governance, the environment or social responsibility. The aim being to influence corporate and shareholder behaviour via share-holder activism or ongoing dialogue.

Overall, with such granular ESG data being available in the market place, compounded further by fund choice and the green washing of fund marketing departments, our approach to ESG research has a strong foundational structure to ensure we select the right funds and products for our clients to meet their preferred moral preferences.

Next Steps

If you’d like to discuss impact investing and how it could be incorporated into your financial plan, please get in touch.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.