How to create a better world with your investments

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Precision targeting your investments ensures you benefit the specific sector of your choice, writes Richard Essex.

A recent survey carried out by Abundance Generation said that 72 per cent of participants were concerned about where their money was being invested. For many years, ethical investing has catered for this concern by reassuring investors that their money is being directed to companies that want to avoid certain negative activities.

We are now seeing the emergence of investments that offer much more specific positive outcomes for the environment and society.

Impact investing comes in many forms. Firstly, environmentally-themed funds have become more adept at showing their environmental credentials.

Impax Asset Management is one such fund manager applying an environmental impact methodology across its fund range, including its flagship investment trust, Impax Environmental Markets plc.

Impax identifies four metrics against which it measures the impact of its investments.

• Net impact from greenhouse gases emitted, less those avoided.

• Positive impact generated from renewable energy.

• The impact from saved water.

• The positive effect of materials being recovered or waste-treated.

Impax is also able to present its outcomes in a user-friendly way. For example, for 2014, it showed it had avoided 1,101,000 tonnes of emitted CO2 via its investments, equivalent to keeping 494,000 cars off the road for a year.

However, you, the investor, may wish to make a more specific impact and have particular projects which are close to your heart. Partly in response to this demand, we have begun to see the emergence of Social Impact Bonds.

These are investment vehicles that link a financial return to a particular fixed social outcome.

The first of these was launched by Social Finance in 2010, aimed at prisoner rehabilitation. The bond offered investors their money back plus a return if reoffending rates had reduced by a certain amount at Peterborough Prison. The jury is still out on whether this has been an outright success just yet. While rates had dropped more than the control group, the difference was not enough to trigger a payment at the end of the first phase. In addition, the Ministry of Justice has decided to cancel the third phase of the scheme, replacing it with a conventional outsourced government scheme from 2016. Therefore a payment, if any, will be made at the end of the second phase. Social Finance believes that if reoffending continues at the current rate then at least investors will get their money back in 2016.

Such schemes may need further refining if they are to appeal more widely to retail investors. However, progress has been made, however, in reaching out to the mainstream in the area of social impact.

SOCIAL RETURNS

One such solution has been provided by the Threadneedle UK Social Bond, launched in January 2014. The bond is a joint venture between Columbia Threadneedle Investments, a leading retail asset manager, and Big Issue Invest, the social investment arm of the Big Issue. It is a UK-regulated collective and, therefore, very accessible to the wider retail public via investment vehicles such as ISAs. In addition, financial advisors will not have to jump through regulatory hoops to provide advice on the fund.

The fund consists of 83 fixed bonds issued by 60 organisations including housing associations, charities and PLCs. Each bond is identified as providing a social outcome across one of eight areas, including affordable housing, education and transport.

In addition, the fund manager is aiming to target more deprived and disadvantaged local communities.

PRECISION IMPACT

Columbia Threadneedle favour bonds that are used directly for financing a specific project. An example is the £200 million bond issued by the Wheatley Housing Group, aiming to finance nearly 3,000 affordable homes in deprived areas of Scotland. Interestingly, the bond ended up raising £300 million.

At the same time, the fund manager will carry out the necessary financial diligence to show that they can provide a healthy financial return. Indeed, the fund is currently holding its own against the average-performing corporate bond fund. According to its Q2 2015 report, the 12-month performance of the bond (up to 30 June 2015) was 6.91 per cent *, against the average index return of 6.52 per cent.

The social impact of the fund is perhaps best summed up by John Hale, chair of the Social Advisory Committee. He said: “Through these developments the fund will play a small but significant part in closing the physical and social infrastructure deficit that hinders the growth of a productive and socially beneficial UK economy.”

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