LCP clarity:
In a world where social justice movements are on the rise, it’s worth looking out for opportunities for socially responsible investments!
LCP insight:
Take a fresh look at your portfolio and consider where your investments can do better – both for your returns, and for the world.
“Addressing climate change is an enormous commercial opportunity – it involves turning an existential risk into what may be the greatest commercial opportunity of our time.”
Mark Carney
Former Governor
I wish I could say that I came up with that quote myself, but this is something that Mark Carney, the former Governor of the Bank of England said at a conference I attended recently about Net Zero emissions in pensions (not that I’m name dropping…). This statement struck a chord with me. When I think about Environmental, Social, and Governance (ESG), the first thing I think about is risk – our job as investment consultants is to anticipate risks and identify areas that could cause a financial loss before our clients allocate capital.
Just focusing on risk can be quite gloomy – within the social investing space it often involves learning about companies that are sneaking modern slavery into their supply chains, exploiting their labour force and discriminating against marginalised communities.
It’s important to know which companies are making these gloomy contributions to the world so that we can engage with them to try and improve matters, or even avoid investing with them if such engagement fails.
We can also look at the other side of the coin: Opportunities.
There are also an increasing number of companies and investments that are doing a lot of good in the social space – and aside from these being rainbows and sunshine from a moral and ethical standpoint, these investments can also offer really good risk-adjusted returns as they aren’t exposed to some of the ESG-related risks that can cause material financial losses to those gloomier companies.
As the world becomes more and more socially conscious and aware of global social issues, there will inevitably be a development in socially focused companies and investment opportunities.
So, with socially responsible investing predicted to double in 2021, what investments are having a positive social impact?
Social bonds
You may have heard of green bonds – debt instruments that raise money to support sustainable projects which are often focused on fighting climate change. Social bonds are the younger sibling of these green bonds – and there is often a lot of overlap between the two.
Rather than focusing on environmental projects, these bonds are used to raise money for projects that aim to achieve specific positive social outcomes – for example around education, sanitation and essential services. The projects are often specifically aimed at helping vulnerable communities, including those living below the poverty line, marginalised populations and displaced persons.
From a financial standpoint, returns on social bonds often match the equivalent levels of returns on conventional bond instruments. They can also provide investors with an opportunity to further diversify their portfolios, as social bonds cover a wide range of companies and geographies, and government policy support is expected to drive a lot of positive development in this space.
Microfinance
Microfinance involves providing loans to low-income groups that often do not have access to mainstream financial systems. It is generally focused on supporting communities in developing countries. From a social point of view, microfinance investments are great for encouraging community-led projects, empowering women (who, in many countries, struggle more to access loans than their male counterparts). One example of a microfinance loan is a project to fund off-grid solar energy that was set up in Kenya.
Microfinance provides great diversification as microfinance investments tend to have negative or low correlations to global stock and bond markets and typically cover a broad range of regions and investees.
Social housing
In the UK there are currently over one million people on social housing waiting lists – these people are often extremely vulnerable such as those seeking asylum and those experiencing homelessness. Social housing is funded by the government and provides these people with a safe space to live in – and apart from this being a positive moral and ethical thing to do, it is important from a cost-benefit point of view for wider society.
Recent studies estimate that for every £1 invested in housing support for vulnerable people, nearly £2 of benefit is realised by the public sector – this is attributed to avoiding additional hospital and health care costs by providing higher quality of life.
But what does this mean for investors, positive social impact aside?
Returns of these investments have been in line with our top rated long-lease property managers. Importantly, contracts for social housing are made with the government, so these investments implicitly have government-backed income reducing risk.
Impact equity investing
Impact equity investing involves buying stocks in companies that have been designed to have a measurable, real-world benefit while providing a competitive financial return. These investments are generally explicitly aligned with the United Nations Sustainable Development Goals, and investors can choose funds that focus on specific areas or goals that are aligned with their own values.
Like many socially responsible investments, the projects and programmes that underly these impact equity investments are often backed by government initiatives that provide extra security. They also cover a range of geographies, providing further diversification benefits.
Conclusion - People, profit and planet
The S in ESG can no longer afford to stay silent.
A healthy, educated and fair society leads to high productivity and growth which benefits everyone – including investors.
Hear more from Laasya Shekaran on the Investment Uncut Podcast series
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