Sustainability and ethical practices have become a hot topic over the past few years. With many people jumping on the sustainability bandwagon, the pressure has been on for companies and industries to incorporate better practices into their business.
The early-stage industry is no different; sustainable investments have increased by 40% in New Zealand in the last year alone1. This movement has seen the rise of impact funds, which invest into companies with the intention of providing measurable, positive social or environmental impact as well as financial returns2. This is not a niche market; as of 2018 there were US$502 billion of impact investing assets under management globally3.
Outside of specific impact investing funds, others have been updating their policies to incorporate more sustainable investments as well. People may be familiar with ethical investment policies which exclude things like tobacco, drugs and illegal activities, but more recently these policies have evolved to encompass the environmental effects and long-term sustainability of the companies they invest in.
It’s important to note that not all funds that have taken on board more ethical practices are the same. There are impact funds whose sole focus is to support and invest in projects which will positively benefit the environment, and there are funds that have some form of ethical investment policies which guide their investment decisions. There is also a third category of funds who have no official ethical guidelines in their investment mandate. Whether you’re looking to place your money in a fund that supports ethical and sustainable projects or you’re looking to raise money from such a fund, it’s important to know the differences in order to select what is best for you.
An impact fund is likely to advertise itself as such and there are organisations, such as B Lab, who have created certifications that require an investment fund to ensure that responsible investing is upheld4 all the way down to their legal structure5. These funds often have Ethical, Social, and Governance (ESG) reporting requirements and portfolio selection criteria which they integrate into the management of the fund6.
If a fund is not specifically an impact investment fund, it doesn’t necessarily mean that no attention is paid to the ethical and sustainable practices of the fund and their portfolio companies. Funds can sit along a spectrum of ethical investment activities from no ethical consideration to impact investing. Some of these activities may include screening out companies which have a direct negative impact on the environment, or screening specifically for companies which have more social or environmental benefit than others7. Matū and Punakaiki Fund are two examples of funds which have their ethical investment policies publicly available on the website8,9 and the Impact Enterprise Fund (https://impactenterprisefund.co.nz/) is an example of an impact fund in NZ.
It is important to determine what core values you would like both the fund and the companies they invest in to have, and what you would feel comfortable having your money supporting before deciding on what fund is right for you. For example, if you wouldn’t want to support a company that doesn’t ensure fair wages for all the workers along their supply chain, then you need to make sure you don’t invest in a fund that would support that.
Every fund will have their own individual criteria so make sure you do your research to ensure they are the right fit for you. The presence of an ethical investment policy alone does not guarantee that it will match your preferences either; the content of that policy is just as important. For example, a fund may invest in companies that have a social underpinning, which you might align with, but one of those companies sells cannabis products, which you might not align with. It can be tricky to navigate the details of each fund’s ethical priorities, but asking questions or having a thorough read of their investment mandate should help to determine if a fund’s investment decisions align with your values. Also, just because a fund has “impact” or “responsible” in the name, doesn’t mean that they necessarily actually follow through on that, so asking questions and doing your due diligence is the best way to cut through and get the truth.
There is a variety of information on the returns of funds
which incorporate ESG practices into their businesses. However, the general
consensus seems to be that they return similar returns to the funds which don’t10,11.
If it’s not something you’ve considered before, I would encourage you to do so
and help create a market push so that more funds incorporate varying degrees of
ESG practices. The world is already burning, so do we really want to be funding
new businesses that fuel the fire?
1 NZ Herald, “Ethical Investing Hits New Highs“
2 Responsible Investment Association Australia, “Impact Investor Insights 2019 Aotearoa New Zealand”
3 Global Impact Investing Network, “What You Need to Know about Impact Investing”
4 Greene, “A Short Guide to Impact Investing.”
5 Certified B Corporation, “Certification.”
6 Responsible Investment Association Australia, “Impact Investor Insights 2019 Aotearoa New Zealand”
7 Noted, “Investing Ethically Is Good for Your Wealth”
8 Punakaiki Fund, “Key Documents”
9 Matū Fund, “About the Fund”
10 Global Impact Investing Network, “What You Need to Know about Impact Investing”
11 Icehouse, “Impact Investing”