Making a difference with your investments

Investing with our hearts as well as our wallets

I often think about how fortunate and proud I am to be part of the team here at Serenity, not simply for the powerful, lifechanging work we do with our clients but because of the very people I have the pleasure of working alongside. We are a team of likeminded individuals with a shared set of values.

It’s not unusual that at our regular get together we find ourselves straying from strictly work related conversations to ones of the state of our planet, the people on it and what we can do as individuals to make a positive difference. This naturally led us to begin exploring how our ethical preferences around environmental, social and corporate governance (ESG) issues influence investment returns and thus, if and how those factors should influence the investment advice we give our clients.

Evidence based investing

If you are already a client of Serenity’s you will undoubtedly have heard us talk about evidence-based investing. We have always strived to ensure that our clients receive the best investment returns they can for the amount of risk they are comfortable taking and this has meant we’ve sometimes had to go against the grain, ignoring much of the noise and hyperbole of the investment industry and instead looking to the various studies that have come out of academic institutions in regard to optimal investing.

It is this thinking that has led us to recommend the evidence-based investment portfolios offered by the discretionary investment manager EBIP Ltd to the majority of our clients.

Earth portfolios

Around the same time that we were having an increasing number of conversations around how the ethical considerations of companies effect their performance, EBIP launched a new suit of portfolios which they have called ‘Earth’. The Earth portfolios are built on the same foundation of research that has gone into the construction of the ‘Global’ portfolios many of our clients will recognise, the main difference is that it integrates ESG considerations into the make-up of the investment portfolios.

ESG integration in the EBIP portfolios screens out some controversial sectors (incl. tobacco production, controversial weapons), and reweights the rest of the market based on ESG scores as one factor, alongside others. This means that more of your investment will be in the most responsible companies in each sector, and less in the least responsible. This process primarily aims to improve risk-adjusted performance, taking advantage of a new, relevant, information-set in ESG scores.

To be able to offer EBIP’s Earth portfolios to our clients alongside the existing Global portfolios is a tremendous development for us and one we are excited to start talking about with our clients but we also felt that for some of us and our clients it just doesn’t go far enough.

The ESG scores for example, do not aim to capture the holistic sustainability of a company. Companies are scored compared to their peers only, and the focus remains on the financially material operational E, S, and G aspects of the business. For example, the ESG leader in the fossil fuel industry may have leading health and safety standards in the industry, yet still provides significant environmental harm through the core products and services. Thus, the Earth Portfolios offered by EBIP do not provide a direct option to invest for positive impact.

Public opinion is shifting

Recent evidence suggests that when asked, more than 70% of the UK public are interested or would like to know more about investing to benefit people and planet. We are keen to provide this option to all clients that are interested in aligning their investments with creating positive change. There really is no company or organisation or government that isn’t thinking about becoming more sustainable, and with this – the investable universe for sustainable investing is growing.

Additionally, regulatory frameworks, like those associated with the EU Green New Deal, are shaping our economy’s transition to a low carbon economy going forward. We think that now is the right time to introduce an investment strategy to our clients that aims to target investments at those selected companies shaping a sustainable future, and that will benefit from associated megatrends.

Opening the door to impact investing

Impact investing is an investment strategy that is now available to anyone and we have partnered with EQ Investors to allow our clients to ‘do good’ with their investments. The EQ Positive Impact Portfolios are constructed with a dual mandate: to maximise positive impact on people & planet, as well as the investment returns for a given risk profile. The philosophy of the portfolios embraces ‘doing well by doing good’.

The EQ Positive Impact Portfolios aim to shift the focus onto what a company actually does at its core – understated by ESG scoring agencies so far. The portfolios invest in companies that deliver products and service that contribute real solutions to environmental and social challenges. This way, the portfolios invest in sustainable themes, turning the greatest challenges into investment opportunities. These themes include access to education, healthcare, provision of renewable energy and freshwater security.

As a natural by-product of this positive selection focus, the portfolios avoid exposure to those companies who harm people and planet. The table below indicates how the positive impact investment approach looks like in practice. In addition to this, ESG is also integrated in the investment selection.

For those of us who are as keen to make a positive impact with our money as we are to achieve optimal investment returns, we will need to step away from the evidence-based approach espoused by EBIP, i.e. constructing portfolios from either index tracking or rules based funds, to one where actively managed funds are used.

The team behind the EQ Positive Impact Portfolios have built experience since 2012 at selecting fund managers running dedicated positive impact investment funds. This allows them to construct their portfolios which are diversified across sectors, asset classes and geographies. It is an active investment strategy, but with a long-term patient capital approach. This means the intention is not to constantly time markets, but to select the sustainability leaders of the future and hold companies for the longer term.

While Serenity are strong supporters of evidence-based investing, this new portfolio range is actively managed by necessity, and invests in a subset of the market in order to fulfil its mandate to maximise positive impacts. Here are the main reasons for this:

– Sustainability is complex. Rating agencies have not yet found a way to quantify this effectively, which would be needed to construct indices. For example, to perform impact analysis on companies, managers often require direct conversations with company management in order to understand the company’s intentions and strategies beyond what is in the public domain.

– In order to maximise positive impacts over time, company engagement is incredibly important. Rules based funds (even if ESG integrated and screened) will invest in 100s to 1000s of underlying securities. It is impossible for fund managers to effectively engage with all these companies to push for positive sustainability change in their operations or product mix.

– Impact investing necessitates impact measurement as a key criterion. It is highly complex to measure and summarise the sustainability impacts of a portfolio, and even more so when investing in large numbers of securities. Ideally, impact performance will inform investment decision making as a feedback loop, which a rules-based fund is not set up to accommodate for either.

So, we are now in the wonderful position of being able to offer a sustainable alternative to evidence-based portfolios we currently offer, whilst also being able to offer our clients a means of investing their money in a truly impactful way to the planet and society. The below graphic sums up nicely why someone might choose to invest in either an ESG integrated portfolio or an impact investing portfolio. ‘Portfolio A’ represents our existing evidence-based portfolios, EBI Vantage Global, ‘Portfolio B’ represents the new EBI Vantage Earth portfolios, and ‘Portfolio C’ represents the EQ Investors Positive Impact Portfolios.

– Tom Desborough