Impact: enter the third dimension of investing
‘Impact investing’ is on the brink of mainstream success. Investors are already tuned into the dangers of investing in companies with poor corporate governance. Now societal trends, regulatory change and emerging measurement frameworks should encourage impact investing to thrive.
At Lombard Odier, our belief in the power of investment to bring about positive social and environmental change is ingrained in our company history. We continually strive to offer our clients superior financial and social returns without compromise. This is what we call “impact investing”.
RETURN, RISK AND IMPACT
Investment today includes three dimensions: return, risk and impact.
Prosperous years following World War II saw the investment community focus almost exclusively on returns. Low volatility and bullish markets meant the priority was to pursue high-yield investments. This changed when the 1973 oil crisis injected sudden volatility into the market, introducing a second dimension: risk. New indicators and tools were developed to integrate the risk factor into investment strategies, and risk analysis became a fundamental part of each and every investment decision.
What happened four decades ago is happening again today, this time with impact investing. Shaped by client demand, regulatory change and the increasing relevance of environmental, social and governance (ESG) factors, investors are beginning to take this third dimension seriously. Collective and commonly used metrics, tools and standards are yet to emerge, but it is only a matter of time before they do.
We believe there are four key drivers of progress.
DRIVER ONE: CLIENT DEMAND
Demand for impact investing has exploded in recent years. According to the latest Global Sustainable Investment Review, the share of global assets under management committed to sustainable investments grew by nearly 10% between 2012 and 2014.1
Millennials place a particularly high importance on impact investing, ranking “driving social change” as the first objective of their investment portfolio, before “delivering financial returns.”2 At the same time, large pension funds, especially in Northern Europe, are increasingly incorporating impact criteria throughout their entire asset allocation.
DRIVER TWO: REGULATORY CHANGE
Regulation affects both asset owners and managers, and comes in a range of forms: from binding legislation to codes of practice and industry self-regulation. A persistent wave of regulation pushing companies to consider environmental and social concerns shows no sign of slowing. This can pose challenges to asset owners and managers that lack the relevant resources. For more advanced participants it represents an opportunity to strengthen investment processes.
Supra-national initiatives, like the UN Global Compact (2000) or the UN Principles for Responsible Investing (UN PRI, 2007), set new standards for investment practice. Country and industry-specific regulations have also been drivers for change. Other regulations, such as The Biological and Toxin Weapons Convention (1972) and the Ottawa Treaty on landmines (1999) have had very real and direct effects, drying up sources of funding for these controversial activities.
DRIVER THREE: REPUTATIONAL RISK
Companies now face greater scrutiny than ever before. Technology enables transparency, raising society’s expectations of how companies should behave, and providing the tools with which to hold them to account. Gaining society’s trust has therefore become fundamental to enhancing corporate reputation, with business leaders learning to integrate societal concerns in what they do.
According to the World Economic Forum (WEF), at least 25% of a company’s value depends on its reputation.3 Reputation, in turn, relies increasingly on a brand’s relationship with society. Corporate social responsibility is now expected to be a core part of business.
DRIVER FOUR: SUSTAINABLE RETURNS
No company can survive in the long run if it depletes the productivity of the natural and human resources on which it depends. A sustainable business must be able to meet the needs of society in today’s economy without compromising opportunities for those of future generations.
It is encouraging, therefore, that evidence from over 2000 empirical studies confirms that investors who take into account ESG issues consistently improve their returns over time.4 We also predict increased investment in responsible companies, as the signatory base to the UN PRI5 has grown to represent just over half of the world’s institutional assets (59 trillion US dollars).
Losing sight of short-term concerns could also cost companies precious value. Using our ESG database and quantitative tools, we found that the cost to a portfolio of owning companies that could experience severe environmental incidents, frauds or social arrests has more than tripled over the last three years. Simply avoiding investing in companies with the worst ESG scores reduces the probability of holding a company that could experience such incidents by a substantial degree.
1 Global Sustainable Investment Alliance (GSIA) (2014), Global Sustainable Investment Review.
2 Capgemini & RBC Wealth Management (2015), World Wealth Report.
3 Deloitte (2014), Global survey on reputation risk.
4 Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233.
5 United Nations, Principles for Responsible Investing (PRI).
IMPORTANT INFORMATION – GENERAL MARKETING
This is a marketing communication issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This marketing communication is provided for information purposes only.
It does not constitute an offer or a recommendation to subscribe, to purchase, sell or hold any security or financial instrument. It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information herein contained do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the marketing communication or otherwise review it with your external tax advisors.
European Union Members: This marketing communication has been approved for issue by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg · Belgium branch, a credit institution regulated in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A. · Succursale en France, a credit institution and regulated in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A. • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. · Netherlands Branch, a credit institution regulated in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. · Sucursal en España, a credit institution regulated in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. · UK Branch, a credit institution regulated in the UK by the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.
In addition, this marketing communication has also been approved for issue by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is regulated and authorised by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) SGIIC, S.A., an investment management Company authorised and regulated by the CNMV. Switzerland: This marketing communication has been approved for issue by Bank Lombard Odier & Co Ltd, a bank and securities dealer authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.This marketing communication may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier. © 2016 Bank Lombard Odier & Co Ltd – all rights reserved.