The most important starting point is your charity’s mission and investment objectives
Most recently, impact investing has brought in a more holistic view about all the outcomes organisations generate. While an ESG assessment can provide insight into how well an organisation is run, it also realises that the impact of goods and services matter too. Moreover, it recognises that the personal and financial motivations of investors can be blended.
The fossil fuel industry helps illustrate the implications of the different approaches to investing. Taking an ethical approach would mean deciding where to draw the line between acceptable and unacceptable companies. For example, at thermal coal producers, supermajors, or the entire industry?
With responsible investing an investor would look to select companies better placed than their peers at managing the industry risks, if they accepted the overall risks of the sector. Finally, with an impact investing approach a decision would be based on overall attractiveness of financial and societal outcomes of the sector and company. This would include considering the investment and revenue which some fossil fuel companies are now making in renewables.
Low carbon portfolios; which are best?
A product manager could use any of these approaches to offer you a “low carbon” portfolio. But which is the best? Irrespective of what a manager promotes, the answer is, it depends. All of these approaches have credible rationale; as well as pros and cons. However, the most important starting point is your charity’s mission and investment objectives – both financial and sustainable ones.
Your investment policy should enshrine these views. But frequently we find with new clients it has been some time since the last review. Or it doesn’t articulate these objectives to guide portfolio construction or manager selection in this new world of sustainable investing. Without agreement around your charity’s objectives, it is more difficult to determine which approach(es) can deliver them.
The investment policy serves as a reference to challenge and ask more questions of current and potential managers. It provides a lens through which to read the articles. It stands in defence of potential reputational risks. It helps you build a portfolio for both financial and sustainability aims.