With more UK investors stating they would like their investments to do some good as well as provide them with a financial return, the profile of impact investing is increasing. Richard Cooper, business development manager at The London Institute of Banking & Finance, looks at what impact investing entails and how paraplanners can help incorporate it into theory arms’ investment propositions.
The events of the last 18 months have created headlines that don’t seem to be going away — the continuing cost-of-living crisis, an ongoing war in Europe and more warnings about the devastating impacts of climate change.
These issues are having an impact on daily life and the choices that we all make. Research has shown that investors are becoming more concerned about ensuring that their investment can make a difference in today’s world.
Triodos Bank’s recent research of 2,000 adults showed that almost two thirds of UK adults feel that individual investors have a responsibility to ensure their money is being used for good, instead of funding harmful practices, such as extracting fossil fuels.
The FCA’s latest Financial Lives Survey data shows that 81% of adults surveyed would like their investments do some good as well as provide a financial return.
Investing in ESG related investments is becoming increasingly important to people and with forthcoming regulation it is undoubtedly going to become even more important in the near future. In particular, there is an increasing appetite for ‘impact investments’.
What are impact investments?
Impact investments are investments intended to generate positive, measurable, social and environmental impact alongside a financial return.
Research undertaken by the Impact Investment Institute shows that the current market is estimated to be worth £58bn in the UK and is likely to rise to £100bn by 2025.
The growing impact investment market provides capital to address some of the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education.
Impact investments can be made in both emerging and developed markets, targeting a range of returns from below market to market rate, depending on investors’ strategic goals.
The Global Impact Investing Network (GIIN) has identified four key elements to impact investments.
- Intentionality: Impact investments intentionally contribute to social and environmental solutions. This differentiates them from other strategies such as ESG investing, responsible investing, and screening strategies.
- Financial returns: Impact investments seek a financial return on capital that can range from below market rate to risk-adjusted market rate. This distinguishes them from philanthropy.
- Range of asset classes: Impact investments can be made across asset classes.
- Impact measurement: A hallmark of impact investing is the commitment of the investor to be able to measure and receive reports on the social and environmental performance of underlying investments.
The importance of establishing investor preferences
In the Schroder Pulse Survey earlier this year, 66% of advisers rate their confidence about talking to clients with consistency about the terminology, regulation, integration, and behavioural implications of sustainable investing as average to low. What’s more, the percentage of advisers who are very confident talking about sustainable investing has fallen from 25% to 6% since November 2021.
In the absence of clear guidance from the FCA about what advisers are expected to do in respect of ESG investing, and the upcoming response to the FCA Consultation Paper CPP22/20 – now expected in Q3 2023 – many advisers are not talking about investor preferences and paraplanners are not clearly identifying client preferences in respect of investing in ESG-related investments.
However, under existing compliance rules, they should already be discussing investor preferences and take this into account when forming potential solutions. Under Consumer Duty they will need a process to evidence this.
A journey of understanding
It is not easy to understand the ESG market – the terminology is often inconsistent; reporting is not always the same and it’s difficult to compare funds on a like for like basis.
The market is difficult to navigate, both for advisers and paraplanners, and it is hard to help consumers that are looking to make an impact with their investments.
This will change with regulation, but there is no getting away from existing compliance requirements.
We are undoubtedly going to need to go on a journey of discovery to reach a level of consistency and understanding where we are comfortable to talk about client preferences and make appropriate recommendations to meet them.
What support is available?
If you want to understand impact investments in more detail, then the Impacting Investment Institute has a free to access learning hub.
For a more inclusive, joined up journey, The Accord Initiative is a suite of compliance, education, CPD and regulatory analysis services, delivered via a free-to-access web site.
The site launched on July 4 and incorporates everything financial advisers and paraplanners need to build ESG and sustainability into their advice process.
Building an in-depth understanding of impact investments will allow advisers to give compliant advice in a way that delivers good client outcomes whilst meeting Consumer Duty, PROD, COBS, and Sustainable Disclosure requirements in a friendly and consistent way.
