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Fund manager Q&A: Damien Lardoux, head of Impact Investing at EQ Investors

29 April 2019

What is impact investing and how can it effect the world we live in? We asked Damien Lardoux, head of Impact Investing at EQ Investors, to explain what he and his team are focussed on and how they go about selecting the right investments for the range of portfolios

For anyone new to positive impact investing, please would you explain the premise.

Positive impact investing is an investment approach that aims to make a positive contribution to society or the environment, alongside an attractive financial return.

The focus is to invest in companies and projects that contribute to solutions to real world problems through their core products and services. Additionally, these organisations should aim to operate in a sustainable and responsible manner. Through proactive engagement, impact investors push these organisations to constantly improve their product mix and operations towards net-positive impact.

How have the EQ Investors’ Positive Impact Portfolios had an environmental impact and a social impact through their investments?

There are several ways to show it. One is company examples help to bring impact to life. For instance, we invest in Kingspan, an Irish-based company contributing to reducing the CO2 of the buildings sector. Through their high-efficiency insulation materials and panels, they save 149 million MWh of energy globally, and about 29 million tonnes of CO2 emissions per year. We also invest in Coigach Community Development Company in North-Western Scotland, which use the profits generated by a local wind turbine to support community-driven development projects. They include the regeneration of the local harbour facilities and provide bursaries to young people to access training and career support.

Another example is the online impact calculator we have developed. This helps each investor to calculate the impact achieved through their investments over the last year. We report on 12 measures of absolute impact which quantify the social and environmental impacts for each pound invested in the portfolios.  Over the last year, £1m invested in the EQ Positive Impact Adventurous Portfolio has:

  • Generated 153 MWh of renewable energy, equivalent to the electricity used by 39 UK households;
  • Cleaned 3.6m litres of waste water, equivalent to the water used by 27 UK households;
  • Recycled 46 tonnes of waste material, equivalent to the waste provided by 47 UK households;
  • Made 362 medical interventions; and
  • Delivered 338 hours of school or university level education.

You are investing in other fund managers with social and environmental mandates. Are these retail and institutional managers?

Yes, with a number of them being boutique asset managers. It is worth saying that all funds we invest in offer daily liquidity and are either authorised or recognised by the FCA to be promoted to retail investors in the UK.

What are you specifically looking for in the funds before investing?

We are looking for fund managers whose mind set is the same as ours and focused on selecting companies helping to tackle social and environmental challenges primarily through their core products and services.

How do you conduct your research – what proportion is face-to-face meetings with managers, quant analysis, etc?

All research is carried out in-house and starts with our asset and theme allocation views discussed formally on a quarterly basis. With the inputs from the strategic asset allocation committee, analysts will look for investments that will best express our views. Analysis conducted is both quantitative and qualitative and the process includes meeting with the fund manager usually several times before a recommendation is made.

To what extent is performance sacrificed to principle with impact investing? Is there a balance between achieving the positive impact and providing a positive return for investors?

Often there is the misconception that making a positive impact on society and the environment must come at the expense of performance. At EQ Investors, we firmly believe the opposite to be true. Indeed, there is ample evidence that it can boost company profitability and your long-term investment returns.

Impactful companies are those that have turned the largest societal challenges into profitable business opportunities. These companies benefit from the growing global demands for their products and services, greater regulatory support and from avoiding reputational and stranded asset risks. A recent report found that bold climate action could deliver at least US $26 trillion in economic benefits through to 2030, compared with business-as-usual.

Although this approach has a shorter track record versus traditional investing, market evidence demonstrates that impact investment can produce market rate returns or above. The EQ Positive Impact Portfolios have outperformed their conventional benchmarks since their launch more than six years ago. Over that timeframe, we have not invested in strategies where returns could be subdued even if the impact could have been meaningful. Indeed, we always keep at the forefront of our minds our dual mandate to maximise both financial return and impact.

How is risk measured in the portfolios?

We have implemented an institutional quality investment process following best practices from the asset management industry. As such, we operate via committee structures, which are highlighted below.

–           Asset allocation: The Portfolio Managers must adhere to the house view, albeit with the scope to express their views with discretion and operate within small variances to these recommendations.

–           Fund Selection: Approved funds’ performance is formally reviewed on a monthly basis, where any outliers are flagged and discussed. Funds held within all portfolios are monitored using our internal database sourcing data from Morningstar.

–           Portfolio monitoring: We have developed a proprietary portfolio management system and database to facilitate ongoing monitoring. More formally, the Investment Management Committee will meet on a quarterly basis to discuss performance attribution, risk and asset allocation to ensure no specified limits are breached.

Your portfolios are aligned to the UN sustainable Development Goals – why these goals and how do you measure against them?

Since 2017, the UN Sustainable Development Goals have become a fundamental part of our process. In September 2015, over 190 countries adopted a set of 17 goals to end poverty, protect the planet, and ensure prosperity for all as part of a new sustainable development agenda. These goals have become a widely adopted framework for impact investors and as a result the Positive Impact Portfolios have been mapped to these goals in our first impact report published in October 2017.

On a regular basis, the underlying companies of invested funds as well as potential new funds to the portfolios are mapped to these goals not only to better understand the themes favoured but also the intensity of the impact generated by each company. Finally, to measure this intensity, each company is measured against a number of key performance indicators. This helps us to ensure that our aim to maximise the impact is being achieved.

Are there key areas paraplanners should look for or be wary of when researching positive impact investments?

When researching positive impact investments, a key focus should be on the impact analysis made by the asset managers. Over the years, we have met with a few who in our eyes are confusing the end investors by supporting companies like Statoil or Facebook whose positive contribution to society and the environment is debatable. Usually, reviewing the full list of holdings acts as a very useful “sniff test” on how stringent the impact assessment is.

Also positive impact investing should not be confused with Environmental, Social and Governance (ESG) investing. Indeed, positive impact investing primarily focuses on the purpose of a company’s main products and services whereas ESG investing focuses on the quality of a company’s operations. But obviously, reviewing the impact of a company’s operations would also be included within the investment process of an impact asset manager.

Finally, engagement should be a key part of the asset manager investment process not only to exercise voting rights but also to push management to improve the overall impact the company is making. That’s why we prefer active management over passive management, as we feel the likes of Vanguard and iShares have disappointed on that front to date.

The Positive Impact Portfolios are available to both private clients and financial adviser firms.