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Impact investing is moving into the mainstream, but at what cost?

Emma Rapaport  |  14 Jun 2019Text size  Decrease  Increase  |  
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The impact investing industry is experiencing incredible momentum as investors seek to make the world a better place.

Since the term 'impact investing' was coined in 2007 to refer to investments that seek a positive, measurable, social and environmental impact alongside a financial return – assets under management has grown to US$502 billion, according to the Global Impact Investing Network (GIIN).

This figure is more than double the US$228 billion stated by GIIN last year.

But George Latham, managing partner at UK-based impact investing firm WHEB Asset Management, believes investors and the reputation of the industry is at risk of 'impact washing' – i.e. some actors may be adopting the label without meaningful fidelity to impact, according to GIIN.

"We're seeing an explosion in the number of products that are labelled as impact investments in this space. But I would caution that there is a real risk in this space of impact washing," he says.

"There is a popularity around the term, and the word is becoming used increasingly broadly. In some cases, it is being increasingly abused. It's not always done in a very genuine way."

WHEB is the investment manager of the Pengana WHEB Sustainable Impact (15887) fund.

Latham says investors can protect themselves by demanding their fund is transparent with their holdings and investment process, and by seeking reputable markers or industry standards.

Morningstar's head of sustainability research Jon Hale issued a similar warning to investors in April about 'greenwashing' after noticing a growing trend among fund managers to add environmental, social and governance criteria to their prospectuses.

"Simply adding a line in a prospectus about ESG consideration doesn't necessarily reflect a real commitment to sustainable investing or a significant change in a fund's investment process," he says.

"And though these funds are not being rebranded or marketed as sustainable funds (at least not yet), the fact that they now consider ESG could be a way to sell them to consultants and advisors looking for ESG funds, allowing them to grab some of the growing ESG market share and stem the tide of outflows from these actively managed funds."

Other funds which say they invest in companies benefiting from the transition to a sustainable economy include the Nanuk New World (41749) fund, Australian Ethical International Equities Trust (17618), BetaShares Global Sustainability Leaders ETF (ASX: ETHI), and the Morphic Ethical Equities (ASX: MEC) fund.

Donna Lopata, a manager research analyst with Morningstar welcomes the growth of ESG-focused investing but warns that that terminology across socially responsible, impact and ethical strategies remains "in its infancy" and that interpretation is "deeply subjective".

Therefore, she says it's important that investors do their due diligence before investing.

"Impact investing may be understood by some as simply a negative screen, whose exclusion from a portfolio is notable," she says.

"Another expression of impact is the ability of shareholders to vote. Some of the passive managers under our coverage have substantial holdings and their vote can be interpreted as impactful.

"The more agreed interpretation of impact investment is alignment with Sustainable Development goals and engagement with companies to improve on these.

"Despite the obvious benefits of impact investing not all investors will be comfortable, including big name fossil fuel companies in their portfolios, even if asset managers are agitating with them to improve their practices.

"Due to the highly subjective approach of ESG-focused investing, it is important that investors look carefully at its process to ensure it is the right fit for them.”

Full transparency

Electing for full transparency, WHEB publishes every holding in their portfolio, alongside a description of why it is included in the fund and how it makes a positive impact.

WHEB also employs an independent advisory committee – staffed by persons outside the firm who have no commercial relationship with the fund – to review the holdings and challenge management on how each company is consistent with their definition. The minutes of that meeting are published on the website.

Latham says the fund has done this to guarantee to investors that their funds are invested in companies that have a measurable social and environmental impact alongside a financial return.

For example,  ASSA ABLOY (XSTO: ASSA B) - a global supplier of locks and security systems – which had sat within the fund's 'safety' theme, was rejected by the committee. Latham says the portfolio managers were challenged to reflect on how their investment is a solution to a sustainability challenge.

"They asked: how do door locks contribute to making a more sustainable world? We concluded at the time that the point of the safety theme was to ensure the security of people, not the security of possession. As a result, we actually ended up selling our position because we didn't feel the source of growth for that business was genuinely solving a sustainability challenge."

Latham said the committee also debates whether to invest in businesses involved in the value chain of an industry.

"For example, if there's a business involved in the clean-up of environmental impact for the oil and gas industry, is that positive impact because you're cleaning up environmental damage? Or is it a less positive impact because you're providing continuing licence to operate?"

Measuring impact

The Pengana WHEB Sustainable Impact fund holds between 50-70 (currently 58) stocks, with a typical holding period of five to seven years. Each company they invest in provides solutions to a sustainability challenge they believe the world will face over the next 30 years.

WHEB's nine sustainability themes

WHEB has identified critical environmental and social challenges facing the world over the next 30 years and invests in a range of companies that provide solutions to these challenges based on nine sustainable investment themes.

Pengana When

Source: WHEB Asset Management

WHEB measures the extent of positive social and environment impact created by the fund. In 2018, the fund helped avoid 218,000 tonnes of CO2 emissions, treated 2.6 billion litres of wastewater and recycled over 49,000 tonnes of waste materials, according to their calculations.

Latham believes investing in companies that are helping the world transition to a low carbon and sustainable economy will ultimately be the best investment in the long term.

"Sustainability is built into our investment processes as a source of investment return. It's not in any way a constraint or a break or a trade-off. It's what we want to find in order to make better investment decision."

The Pengana WHEB Sustainable Impact fund delivered 1.33 per cent to investors in the year to 31 May 2019. This compared to MSCI World Small Cap returns of 0.06 per cent, and Equity World Mid/Small category returns of -1.34 per cent.

Morningstar and Pengana show different long-term performance figures on their websites. Morningstar's includes the performance history of the Hunter Hall Global Deep Green strategy (from 30 April 2012 to 31 July 2017), which Pengana took over in August 2017, and the Henderson Industries of the Future Fund (from 1 January 2006 to 31 December 2011). The performance figures featured on the Pengana website includes partial simulation derived from the identical UK based WHEB Sustainability Fund.

The Australia-based fund has $31.5 million under management and a management fee of 1.35 per cent.

The Pengana WHEB Sustainable Impact fund is not currently under Morningstar fund research coverage.

is an editor for Morningstar.com.au

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