Impact investing: when financial returns are not enough

A quick online search will tell you there are seemingly countless ways to invest your money ‘responsibly’ or ‘sustainably’. It could also unearth some new terms, like ‘ESG’ investing.

You might be asking yourself what these mean. Getting your head around some of the basics could help you put your long-term investments to work in a way that better aligns with your aspirations and values.

Here, we look to explain what we, at M&G, consider the foundations of responsible investing and how, through impact investing, you can aim to make a positive contribution to society – without necessarily compromising on your own financial goals.

ESG and why it matters

We believe it is part of our duty, as responsible investors, to consider all factors that could have a material effect on investment outcomes, either positively or negatively.

This includes environmental, social and governance (ESG) factors. There is a danger that these are overlooked in analysis that looks solely at more traditional financial metrics, like profits, assets and debts.

Yet disregarding ESG factors could be costly for investors in the long run. The implications of poor governance, and of disregard for the environment or society, are likely to undermine a company’s performance in the end.

For this reason, we believe it makes financial sense to integrate ESG factors into the investment process. By capturing the potential risks and opportunities of an investment more fully, we can hope to improve investment decisions and so financial outcomes.

Building on the foundation of ESG

A growing number of investment strategies go further than integrating ESG factors, and also seek to deliver a specific objective or outcome relating to the environment or society, and sometimes both.

Adding to the differing aspirations relating to non-financial fund objectives, there is a range of names given to them by different companies. This can understandably lead to some confusion when comparing products.

New rules were introduced in the European Union in March 2021 to make this all a little clearer. The Sustainable Finance Disclosure Regulation (or SFDR) aims to improve transparency surrounding financial products that have some degree of focus on sustainability.

Products must now be classified according to the SFDR framework. Funds that actively promote environmental or sustainable characteristics are said to be ‘Article 8’ products, and those that have sustainable investment as their objective are deemed ‘Article 9’.

These two articles of the regulatory text spell out the exact distinctions made between them. However, for both tiers, you can expect providers to demonstrate how their characteristics and goals are met through how they report on that fund’s performance.

Targeting returns for you – and global society

At the farthest end of the spectrum of responsible investment approaches is impact investing. Impact strategies are distinguished from others by seeking to achieve a dual objective: to deliver both a positive societal impact and financial returns.

By investing in companies that explicitly aim to deliver meaningful outcomes for the planet and its people, investors can play a part in helping to address the world’s greatest societal and environmental challenges.

When it comes to impact investing, we believe every company must demonstrate the measurable positive impact that it is delivering. Indicators of performance will be relevant to the activities of a business. So, for instance, we might measure the impact of a renewable energy company in terms of carbon emissions saved each year.

Of course, there can be no guarantees when it comes to returns from investing, but there is no evidence that impact investing leads to lower financial returns over the long run. The aim is to achieve a social or environmental purpose alongside financial gains – not instead of them.

The two goals of impact investing can – and should – go hand in hand, in our view. We believe there are terrific opportunities for innovative companies that can successfully deliver solutions to the world’s challenges.

The views expressed here should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.