We are at a point in history when climate change is in the news daily. Often it feels like we have no control over the fate of our planet. Pollution is driven by the corporations that provide our energy and supply our food. As an individual, boycotting plastics and cutting down on meat consumption can feel futile. But extending sustainable practices into our investment portfolios can feel a little more influential.
Impact investing is not just replacing oil investments with a few solar tech stocks. It’s a measurable, strategic investment pathway that seeks to combine profits with peace of mind.
But as an asset class, even over a decade after its emergence, impact investing routes including ESG (Environmental, Social and Governance) and SRI (Socially Responsible Investing) haven't achieved quite enough momentum to dispel doubt.
Financial rewards are nice, but they’re not always comfortable. Moving to a more ethical investing strategy can ease our mental burdens, but it must be balanced with sustainable (in the financial sense) returns. Let’s look at some of the pros and cons of impact investing.
Pros of impact investing
- Consumer sentiment. The capitalist philosophy that supports profit at all costs is rapidly falling out of fashion. There’s no doubt that consumers are demanding cleaner practices. Companies that fail to implement clear sustainability and social good principles may ostracise themselves from growing numbers of conscientious consumers. Investors comfortable with unethical companies are likely to end up in the minority in the near future.
- Growing transparency in the sector thanks to sustainability reporting. All S&P companies have annual Corporate Sustainability Assessments which are public record. But many non-listed companies have been voluntarily publishing sustainability reports for several years (here’s Innocent’s example from 2019).
- An abundance of ESG funds, robo-investors, and dedicated reported channels are making the process of impact investing smoother and safer. Exchange Traded Product (ETP) issuers like BetaShares Capital and VanEck Australia offer ETFs specifically geared towards sustainability such as ETHI, FAIR and GRNV. Research organisations like Morningstar provide their own sustainability charts and ratings based on ESG factors. The Ethical Consumer gives ‘Ethiscores’ to goods to advise from a consumer perspective.
- Finishing with the obvious, impact investing offers a chance to make a real change. Ethical investors want to see the tide turn on unethical companies. If this movement can gather enough speed, corporations and suppliers will be forced to either adopt social and sustainable practices, or get left behind.
Cons of impact investing
- The ever present threat of greenwashing. A company may have built a strong sustainability profile through PR and brand messaging, but check what the experts say. The oat milk brand Oatly provides a cautionary tale. Its plant-based agenda seeks to ease the world’s reliance on inhumane and unsustainable dairy farming, but in Q4 of 2020, it accepted a $200 million investment from Blackstone, a private equity firm linked to deforestation and the famously non eco-friendly Trump administration.
- As an extension of the above, ethical and sustainable practices must be holistic. As the ‘S’ in ESG reminds us, ethics are not limited to protecting the planet, but to protecting workers, farmers, and customers at the same time. This is likely to mean more research, more digging, and greater skepticism than an investor might apply to more mainstream investments.
- Even with improved reporting, claims can be misleading. Tesla provides a classic example of this. A purportedly ‘green’ organisation with excellent carbon strategy, Tesla scored just 22 out of 100 in its 2020 ESG report. Progress made with environmental strategy was hugely undermined by low-scoring management systems, poor staff development, and dubious labour practices.
How to impact invest profitably
When switching up investment strategy, your basic rules should still apply. Whether you’re a value investor or dividend investor, your usual investing practices and due diligence should be implemented when moving to impact-led stocks.
Consider starting with a gradual SRI-based recalibration. Review the stocks in your portfolio and ‘greenify’ it through the process of elimination. Exclude any organisations linked with deforestation, tobacco production, exploitative labour, or arms.
Although it’s been slow to take off, impact investing may herald one of the biggest changes in investing history. It’s not simply a market disruption, or a trend to jump on, but a huge, global shift in priorities and perspectives.
At STAX, we're firm believers in ethical investing and our recent capital raise for West Coast Agriculture is one of the many sustainable opportunities we have in the pipeline for investors. Sign up today to stay in the loop.