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Strategy & Principles
3D Investing
Contents
A personal introduction Page 3
What is 3D Investing Page 5
Why 3D Investing Page 7
SRI Strategies Page 12
Asset Choices Page 24
Tax Concessions Page 33
Performance Page 35
3D Investment Principles Page 37
3D Investment Model Page 43
Summary Page 47
About The Author Page 48
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Introduction from John Fleetwood, Director
In September 1987 I entered the financial industry. It was a momentous time, with the financial world being rocked by 'Black Wednesday', when markets across the globe fell like a stone. Stocks became valued at 30% less than they had been just days earlier. How could this be I asked myself? After all, the outlook for the companies hadn't changed that much. And of course, they hadn't; but how they were valued had. I had received my first investment lesson - that perceptions of the world do matterand have a profound impact on how we value things.
Two years later and my view had changedtoo. Like many other investors, I had cometo recognise the incongruence of mypersonal life and my personal finances. I In1991 I stopped shuffling paper in aninsurance company and started to advisepeople on ethically screened investments,something that I did for the next 13 years.Over this time the popularity of ethicalfunds just grew and grew and with it mybusiness. But I had become increasingly dissatisfied with the funds that I was promoting. Yes, ethical funds had grown in number and popularity, but, with notable exceptions, they failed to inspire me. A quick glance at the top ten holdings revealed them to be not that very different from the conventional portfolios that theyreplaced in my panel of recommended investments. Moreover, the reliance of ethical funds on the equity markets was cruelly exposed in the dotcom crash of 2000 when ethical investors began to experience the truth of the small-print that says 'investments can really go down as well as up'. Indeed it felt for a while as if it wouldbe better to say that investments can go up as well as down. Something had to change – not to do so would compromise my clients and me. If I didn't believe in theproducts, what hope was there for my clients?
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Yet I hadn’t lost faith in the belief that it is possible to manage wealth so as to make a social difference and I chose to develop an investment service in which I could believe and one in which I was happy to invest myself. I sought to design a service where the values of the client are truly reflected in their investments; where exposureto market sentiment is controlled; and most importantly, where the underlying investments inspire me and the investors who placed their trust in me.
I set up Ethical Money to enable investment managers and advisors to build such a service. It represents a holistic approach to socially responsible wealth management, with making a social difference at its heart. It combines ethical investment and investing for social impact, whilst utilising a wide range of investment vehicles and managing risk. The over-riding objective is to help deliver a portfolio that meets or exceeds investors financial and social expectations. We search out investments that are tackling key social and environmental challenges, embracing a wide range of assets.
This is something new. Its not just about socially responsible investment funds, its notjust ethical portfolio management and its not just impact investing. It’s all of them combined in a melded portfolio based on a personal investment journey of more than 25 years. Why not join me on that journey?
John Fleetwood
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What is 3D Investing?3D investing is an investment approach that combines a number of different socially responsible investment(SRI) strategies to enable the construction of an investment portfolio that aims to deliver long-term financialreturns whilst effectively managing risk and retaining a high level of ethical integrity. It has a core purpose of making a social or environmental difference, but with the expectation that financial needs can be met at the same time. Specifically, the key criteria that define 3D investing are:
(1) Social impact is a core principle. Its not enough to simply avoid the 'bads' or to put a small amount of the portfolio in positively screened stocks. Within the given financial parameters, the goal is to maximise social return wherever possible.
(2) Financial returns should reflect the level of risk being taken and although 3D investing is not about maximising returns, neither is it a philanthropic exercise, but rather a way of generating long-term financial returns.
(3) Ethical compromise is inevitable but this should be readily defensible and reduced wherever possible.
(4) Investments are not short-term trades. 3D investing is all about investing in financially sustainable investments in the long-term.
(5) Risk is inevitable, but can be reduced by utilising a wide variety of assets and ap-proaches.
(6) Dividends and other forms of income are a very important part of investment return.
Dividends have historically made up around ¾ of overall equity returns
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3D InvestorsWe believe that 3D Investing is an intelligent way of managing money for investors who are committed to using their capital in a way that delivers benefits beyond their own financial welfare, but it isn't for every-one. In particular, investors may need to:
Be prepared to sit through periods of volatility;
Accept (but challenge) ethical compromise
Ignore what may be financially attractive propositions if these do not deliver an acceptable social return
In some instances, accept a below-market rate of risk-weighted financial return, in order to achieve outstanding social impact
Move away from conventional financial benchmarks
Share the risk of investing in real assets
Composition of the 3D Investing Universe3D Investing embraces a wide spectrum of investments from debt to equity and physical assets, and an equally wide range of investment return profiles. Most 3D Investments are listed on recognised stock exchanges, but some are not. They are not philanthropic gifts or trading investments. They are part of the socially responsible investment universe embracing:
Ethical Funds
UK & Global Equities
Fixed interest securities
Index linked stock
Social Property
Microfinance
Impact investments
Environmental & Social Infrastructure
The relative merits of each of these types of investment are detailed later in this report.
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Why 3D Investing?The core motivator is one of using money to make a social impact whilst meeting personal financial goals. 3D Investing goes way beyond simply avoiding undesirable activities or targetting environmental technologies. It provides a solution for the investor wanting to maintain a high degree of ethical integrity in their portfolio, whilst delivering long-term financial returns and generating sustainable income flows. It melds the best of a number of different approaches to make a cohesive whole, and it does so in such a way to maximise the social impact within this framework.
Because the problems are getting worse and investment solutions are neededDespite the best efforts of charities and governments across the world, the problems that they have pouredso much money into trying to solve over the last century persist. If anything, they get worse and the scale ofthe problems is such that investment solutions are required, and these solutions offer great potential for financial profit.
SectorPotential Invested Capital Required, $billion
Potential Profit Opportunity, $billion
Housing: Affordable urban housing $214 - $786 $177 - $648
Water: Clean water for rural communities $5.4 - $13 $2.9 - $7
Health: Maternal Health $0.4 - $2 $0.1 - $1
Education: Primary education $4.8 - $10 $2.6 - $11
Financial Services: Microfinance $176 Not measured
Table 1: Opportunities & costs, Source: JP Morgan, 2010
Because investors want to make a differenceOnce you've made yourself comfortable, what do you do with your wealth? Buy a football team, another house, sponsor a university or invest to make an impact? And this applies to the less wealthy too. Investingfor social impact as well as financial return gives a real purpose and excitement to investment. Leading financier, Sir Ronald Cohen, sums it up like this:
“In making philanthropic contributions, you get fulfilment. But with social investment, the additional satisfaction that you get is to see the whole system change.”
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Because capital can be reconnected with the rest of lifeInvestment largely seems to operate in a moral vacuum, with the social consequences of investment not being considered at all, even by many philanthropic organisations. The Panahpur Foundation puts it like this:
“We live in a world where charitable pounds, taxation pounds and investment pounds are operated in isolation of each other, inthree completely different ways. Why? In the evolving world of investing for positive social outcomes, the conventionally applied grant is the financial equivalent of a flint axe head.”1
3D Investing reconnects investors with their money by making the social impact of every investment transparent and by justifying each investment on social grounds.
Because it reduces social compromiseMany ethical or socially responsible funds make very significant social compromises, investing in companies that socially motivated investors struggle to reconcile with their beliefs. Furthermore, the majority fail to adequately justify these holdings from a social perspective and are far from transparent in detailing the portfolio. Application of rigid screening criteria without a team to make value judgements also leads to a rather straitjacketed approach that regularly throws up surprising anomolies. 3D Investing maintains ethicalintegrity without exposing the investor to excessive risk. It achieves this through investing in a wide range of assets including individual equities and bonds, funds and less conventional holdings. It combines approaches to manage risk, but is always mindful of the actual social impact.
1
'The End of Charity and the renewal of welfare', Panahpur, 2011
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3D Investing: Demand from High Net Worth InvestorsIn Europe, most high net worth social investors restrict their social investment to a very small part of their portfolio, but around 10% hold the majority of their investments in socially responsible investment (SRI) funds. Furthermore, 75% of HNWIs think that SRI will increase in the generational transfer of their family’s wealth.2
Eurosif summarised the motivation for investment in SRI like this: “HNWIs choose sustainable investments with their heart, because they think it is a responsible thing to do”. This is the prime driver for SRI, but financial reasons are important too.
Source: Eurosif HNWI & Sustainable Investment Survey 2008
NESTA conducted research in 20113 with 505 investors holding between £50,000 - £1 million. In this survey around one-third of those interviewed agreed the statements below, which suggests that there is a substantial opportunity for investment products that appeal to those with ethical values.
“When investing, I would like my money to do some good as wellas provide me with a return”
“My investment portfolio reflects my ethical values”
“I like to be involved in local community activities”
2
High Net Worth Investors & Sustainable Investment, Eurosif 20083 'Investing for The Good of Society' – Nesta, 2011
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The demand for SRI has led to continued growth in funds under management in the UK
Barriers to 3D Investing
However, the uptake of SRI has been much lower than the research into demand would indicate. This surelyhas a great deal to do with the intermediary community. Advisors and to a lesser extent, investment managers, simply can not justify the time and expense of introducing a third layer of complexity, even if they have the motivation which is mostly not the case. The potential income stream is also too small to take on the extra costs, unless the business constitutes a significant proportion of the business. In fact many advisers and commentators believe ethical investment to be well meaning but ill advised.
'If you're looking for the best returns and want to mitigate risk, we don't advise that you invest ethically'
– Investors Chronicle
'The very best fund managers don't choose to restrict themselves to ethical investing'
- Patrick Connolly, CFP, AWD Chase de Vere
In any case, High Net Worth Investors are tending to conduct their own research into sustainable investments and to transact those investments directly with the provider.
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Source: Eurosif, 2012
The Calvert Foundation sums it up like this:
“Bigger financial firms are interested but are often unmoved by the slivers of demand they observe, and with specialists better poised to handle these needs,there is an opportunity. Many firms expressed a wish for someone – a specialist, not in direct competition – who could help that small sliver of theirclient base wishing to make values-based investments. We believe that creative “win-win” commercial arrangements between big institutions and specialists may play a key part in unlocking greater capital flows into the sector.”2
Our objective is to be that specialist partner.
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Investment UniverseSo what exactly is available to the socially motivated investor? 3D investment embraces a wide range of approaches, assets and investment structures, each with their relative merits. It’s probably beneficial to look at the different approaches in the first instance.
SRI StrategiesTraditionally, ethical investment operated on the basis of ethical exclusion, but has mushroomed to embrace engaging with investee companies, selecting investments on the basis of ethical leadership in a given sector, thematic investing, impact investing, norms based investment and passive, index driven investing. These are not mutually exclusive but can be combined in a composite strategy.
Ethical Exclusion
What is it?Ethical investment is still synonymous with avoiding ethically unacceptable practices, at least in the eyes of many. Ethical exclusion remains an important part of the SRI toolbox and this approach involves excluding certain companies on the basis of pre-determined ethical criteria, usually by employing an external researchcompany to arrive at an acceptable universe of stocks from which the manager is free to buy without further reference. Despite the oft quoted criticism that ethics are subjective, exclusion criteria are rigorously applied with highly defined criteria so that there is little room for subjectivity. For example, one criterion might be ‘deriving more than 10% of turnover from the sale of alcohol’. Many tens of criteria can be employed with differing levels of exclusion. UK funds tend to use EIRIS to conduct the screening and some conduct market research with their investors to refine these criteria.
Pros Objective criteria Cheap and easy to implement Meets many investors concerns Leaves the investment manager free to invest in the normal way from a limited universe of stocks
Cons Represents a very negative approach which doesn’t translate to ethical practice Doesn’t address ‘grey’ areas where some discretion is called for Doesn’t direct money into areas that the investor wants to support Doesn’t influence corporate behaviour If criteria are stringent, it makes it more difficult for the fund manager to perform Likely to skew a portfolio by eliminating specific sectors
Our ViewEthical exclusion is a vital part of 3D investing. In many respects it represents the foundation stone, but without an overlay of other strategies it is something of a blunt tool and beyond conscience salving, it’s difficult to see what impact it actually makes.
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Engagement
What is it?Engagement is an investment approach that seeks to bring about change by influencing the companies in which investment is made. Rather than avoiding companies because of the nature of their activities, fund managers seek to engage with the companies in which investment is made, using their influence as major shareholders. This normally takes place by way of dialogue with senior company management, but it can also take the form of shareholder resolutions and as a last resort, disinvestment.
Pros Can result in significant changes in corporate practice, eg. supply chain of retailers Doesn't exclude companies and therefore doesn't constrain an investment manager
Cons Only effective where the investment manager has a substantial stake and has real influence Engagement is often centred around corporate governance which is limited in its scope, mainly
involving issues of pay and management Requires a significant team to do it well Far from all companies are fully transparent about their engagement activity
Our ViewDone well, engagement can help to bring about significant changes for the better, but too often it centres around issues that are peripheral to socially motivated investors. It also needs scale to make it truly effective, something that only the largest investment managers have. It is also unlikely to satisfy socially motivated investors if used in isolation from other SRI strategies, but as an additional overlay, is valuable if the investment company has the capacity and scale to enage effectively.
TYPICAL EXCLUSION CRITERIA
Alcohol X Animal Testing X
Armaments X Gambling X
Genetic Modification X Human Rights Abuses X
Intensive Farming X Mining X
Nuclear Power X Oil X
Pollution X Pornography X
Tobacco X Tropical Timber X
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Best of Sector Selection
What is it?Best of sector or class investment generally means expressing a preference for investments that demonstrate social or environmental leadership in their industry. What constitutes social or environmental leadership is inherently subjective, but there are a number of research companies that conduct such analysis using comparative data.
Pros Allows fund managers to invest without excluding whole industries Facilitates investment in larger companies which may be excluded by a more restrictive approach Rewards good practice
Cons Is inherently subjective as to what constitutes 'best practice' Requires substantial research Can lead to the inclusion of controversial companies
Our ViewThis is an important part of 3D Investing but needs to be treated with a great deal of circumspection. Companies regarded as being leaders in their sector seem to change over time, and leadership needs to be continually re-assessed as companies getting better at 'playing the sustainability game'.
ENGAGEMENT IN PRACTICE
Dialogue - Regular discussions with board directors and other executives
Voting - Shareholdings are voted on behalf of clients in line with the provisions of the
investment mandate.
Policy research - Bespoke research may be commissioned on a range of
governance and corporate responsibility policy issues.
Public statements - Publishing papers on important issues of corporate governance
and responsibility.
Sponsoring debate - Sponsoring discussion between interested parties in order to
better identify good practice.
Working with others - Institutional investor collaboration.
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ESG Integration
What is it?This involves explicit consideration of Environmental and Social Governance (ESG) factors alongside financialissues in the mainstream analysis of investments. The integration process focuses on the potential impact ofESG issues on company financials, which in turn influences investment decision. Issues tend to revolve around climate change, energy usage and social factors that have a material impact on company profits.
Pros Is an extension of normal financial due diligence and doesn't constrain the investment universe Can enhance returns Highly objective and analytical approach
Cons Is limited in scope to issues that have a clear financial benefit Financial benefits/costs can take a long, long time to come through Requires research team
Our ViewIncorporating ESG research into the normal financial analysis makes a lot of sense for institutions that have the capacity to do this. Having said that, its largely financially driven, and is in no way a replacement for other SRI strategies since many ethical issues do not automatically translate into superior performance, and in any case, the financial benefits/costs can take a very long time to work their way out.
Norms Based Screening
What is it?Norms-based screening involves the evaluation of a prospective investment against certain minimum standards of business conduct. These standards are based on internationally recognised norms such as the United Nations Global Compact principles. Once a screen has identified companies that potentially violate these norms or standards, a fund manager divest immediately , but may also prefer to engage with the company before considering divestment.
Pros Easy to implement Excludes relatively few companies and therefore gives the investment manager a considerable
degree of freedom
Cons Only eliminates the very worst and is unlikely to satisfy most socially motivated investors
Our ViewThis is a very weak SRI strategy that simply allows large fund managers to avoid the very worst ethical transgressions and 3D Investing goes much further, so norms based screening is pretty much taken for granted in 3D Investing.
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1. Businesses should support and respect the protection of internationally proclaimed human rights; and
2. Make sure that they are not complicit in human rights abuses.
3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
4. The elimination of all forms of forced and compulsory labour;
5. The effective abolition of child labour; and
6. The elimination of discrimination in respect of employment and occupation.
7. Businesses should support a precautionary approach to environmental challenges;
8. Undertake initiatives to promote greater environmental responsibility; and
9. Encourage the development and diffusion of environmentally friendly technologies.
10. Businesses should work against corruption in all its forms, including extortion and bribery.
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Index Based
What is it?There are a growing number of funds based on SRI indices. These funds are based on indices that reflect equity markets to which exclusion screens are applied (eg. FTSE4Good), thematic indices (e.g. Lyxor World Water) and indices based on sustainability criteria (eg. Ishares Dow Jones Europe Sustainability Screened ETF).
Pros Reduces the volatility involved in stock selection Low cost Allows close benchmarking
Cons Ethical and sustainability screens are limited Thematic indices usually take very little account of wider ethical issues
Our ViewFunds based on thematic indices can be very useful in gaining exposure to specific sectors without the volatility associated with individual equities. However discretion is necessary to consider wider ethical issues and only a limited number will meet most socially motivated investor concerns. Wider SRI indices aremuch less likely to meet these concerns and do not generally form part of the 3D Investing universe, whereas appropriate thematic indices are an important way of reducing the volatility of investments with a defined social impact.
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Thematic
What is it?Social and environmental challenges abound – climate change, resource depletion, population pressures and so on – but challenges create opportunities and the bigger the challenge, the greater the opportunity. Thematic investing focuses on investing in companies whose core product or service provides a partial or total solution to these key challenges. Typical solutions might include clean energy, resource management, energy efficiency, healthcare, public transport, sustainable forestry, eco-housing and the provision of clean water.
Pros Has a clear social or environmental purpose Meets many investors' social objectives Strong financial rationale
Cons Carries high levels of volatility Can be substantially impacted by Government policy
Our ViewThematic investment is very much in line with our own philosophy and enables investors to channel their money to make a social and environmental difference. However, 3D Investing uses thematic investing in conjunction with other approaches to reduce the overall risk and volatility.
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Table 2: Thematic responses to structural challenges
STRUCTURAL PROBLEM SOLUTION
More people living longer and needing care
► Healthcare for elderly, long term care
Climate change ► Renewable Energy, Energy efficiency
Inadequate access to clean, potable water ► Water provision, treatment and conservation
Resource constraints ► Recycling, efficient manufacturing processes
Capacity constraints on landfill ► Recycling, energy from waste, product design
Access to finance for the poor ► Microfinance, mobile applications
Empty homes and inadequate housing ► Social housing
Pressure on transport systems ► Public transport
Inadequate universal access to education ► Online educational resources
Chemicals in food, poor animal welfare ► Organic farming, natural technologies
Tropical deforestation ► FSC wood, reforestation
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Impact
What is it?Impact investing takes thematic investing one step further. It is investing for the primary purpose of makinga social or environmental difference, but with the expectation of a financial return which may be below or at the market rate. Impact investment is best thought of as neither a financial investment nor philanthropy but as something quite different – a social investment that deserves its own allocation of capital. It seeks to bring about social or environmental change by using new capital to make something happen that wouldn't be possible without that capital. Examples include community benefit societies investing in community owned assets, social impact bonds where the financial return is dependent on social outcomes and unsecurred loans to fair trade lenders.
Pros High social impact Potential to recycle money (unlike philanthropy) Strong connection between investor and investee
Cons High risk of capital loss Very difficult to sell Need for due diligence Returns may be below par
Our ViewImpact investing is the most exciting area of SRI and enables an investor to get really close to the action and to make a clear social difference. This must be balanced against the high risk of capital loss, low liquidity and in some cases, modest returns.
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Impact investments can make a real difference to the lives of the global poor
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Table 3: Comparison of different SRI strategies
APPROACH PROS CONS
Ethical Exclusion ► Cheap and easy
► Objective
► Popular with traditional ‘ethical’ investors
► Easy for fund manager
► Skews portfolio
► Limits investment universe
► No positive investments
► No influence on corporate behaviour
► Overly rigid – no consideration of ‘grey’ areas
Engagement ► Can lead to significant change in corporate behaviour
► Doesn’t limit investment universe
► Requires scale
► Usually limited in scope
► Needs committed team with a high level of transparency
► Doesn’t exclude any companies, no matter what their ethics
Best of Sector Selection ► Allows investment in larger companies and all industries
► Rewards good practice
► Subjective
► Requires significant research resource
ESG Integration ► Can enhance returns
► Objective & analytical
► Doesn’t limit investment universe
► Limited in scope
► Requires significant research resource
► Benefits can take a very long time to come through
Norms Based Screening ► Easy and cheap to implement
► Few limitations on investment universe
► Only avoids the very worst companies – unlikely to satisfy most investors
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APPROACH PROS CONS
Index Based ► Cheap and easy to implement
► Objective
► Allows close benchmarking
► Lower volatility
► Broad based indices have very limited screens – unlikely to satisfy most investors
► Lack of screening on thematic indices
Thematic ► Strong rationale – long term tailwinds
► Attractive to investors
► Clear social purpose
► High volatility
► Prone to change in governmentpolicy
► Lack of diversification
Impact ► High social impact
► Ability to recycle money
► Connects investor and investee
► High risk of total capital loss
► Very difficult to sell
► Requires extensive due diligence
► Returns may be below par
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Asset ChoicesJust as there is a diversity of strategies for the socially motivated investor, so is there a wide range of assets. These can be combined to meet the risk profile and financial objectives of the investor in a similar fashion to conventional investment, but there are limitations as noted below.
EquitiesListed equity investments are the bedrock of SRI. It is possible to invest in ethical and sustainability funds with UK Growth, Global Growth, UK Income, European Growth, Emerging Markets and Thematic mandates.
UK GrowthDespite the globalisation of portfolios, the UK is still likely to constitute a significant proportion of equity holdings for UK investors as the currency risk is diminished. There are many funds in this sector with differing approaches, and it’s also easy to select a portfolio of liquid direct equities.
Global GrowthAgain there’s a wide range of funds, although non-thematic funds need close scrutiny to ensurethat investor’s social concerns are met, and in this case, thematic funds may represent a better choice if the risks associated with sector concentration are acceptable. Again a portfolio of liquid direct equities can be selected, although the choice of tradable equities may be somewhat limited.
UK IncomeIncome producing funds providing the potential for income streams that keep pace with inflation are limited in number and the available funds make substantive ethical compromises, but it’s also easy to construct a portfolio of ethically screened equities generating a decent income.
EuropeThere are still many reasons for investing in quality European companies. A considerable number of funds provide exposure to European equities and there is also a reasonable choice of tradable direct equities.
Emerging MarketsThe long-term rationale for investing in emerging markets is well established. It is possible to invest directly in securities focussing on emerging markets, but the level of risk, lack of corporate governance and illiquidity, make this a somewhat fraught strategy. A very limited range of funds is , however, available to provide this exposure.
ThematicIn recent years, thematic SRI funds have grown in popularity and tend to have a global or US mandate. These include exchange traded funds with climate change, clean energy, healthcare and clean technology themes. Some investors regard agriculture as a suitable theme for SRI funds, but our view is that the available listed funds are far from socially responsible and are therefore excluded from the universe until such time as this changes.
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Table 4: Sample Thematic Funds
FUND FUND TYPE SECTOR
Climate Assets OEIC Climate Change
Guiness Alternative Energy OEIC Clean Energy
Henderson Global Care Growth OEIC Multiple Environmental andSocial
Impax Environmental Investment Trust Investment Trust
Multiple Environmental
Ishares DJ US Medical Devices Index ETF Healthcare
Jupiter Green Investment Trust Investment Trust
Multiple Environmental
Lyxor World Water ETF Water
Phaunos Timber Investment Trust
Sustainable Forestry
Sarasin Sustainable Equity Real Estate
SICAV Socially Responsible Real Estate
WHEB Sustainability OEIC Multiple Environmental andSocial
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Climate change is one of the most topical issues of our time and the investment industry has not been slow to respond. However, most of the funds are not focussed on companies whose core activity is the reduction of carbon emissions. Rather the focus is generally on companies that will benefit from the opportunities generated by climate change, which means that the funds are likely to include stocks that will concern many social investors. Likewise, not all cleanenergy funds are without ethical controversy, as some have exposure to fossil fuels and nuclearenergy. Similarly, although investing in healthcare is of clear social benefit, there are multiple ethical issues including animal testing, environmental pollution, gene technology and access to drugs, and none of the healthcare funds employ ethical criteria. Discretion is therefore called for in using thematic funds for 3D Investing purposes, with a keen eye for potential ethical issues and stock selection.
►
THEME POTENTIAL ETHICAL ISSUES
Clean Energy Fossil fuels, nuclear
Healthcare Animal testing, marketing ethics, gene technology, pollution
Climate Change Beneficiaries of climate change are not necessarily ethical
Infrastructure Airports, roads, power stations
Forestry Monocultures, Lack of adequate certification
Water Affordability, Environmental standards
Agriculture GM, fossil fuel use, impact on poor
Information Technology Corporate ethics, supply chains
Table 5: Ethical issues with thematic funds
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Fixed InterestFunds in the sector tend to focus on sterling denominated corporate bonds, with some accepting UK gilts. There is a heavy reliance on financials and if a distinctive approach is required, it may be necessary to investdirectly.
There are an increasing number of retail bonds that may be suitable, especially in the social housing sector. Furthermore, it is possible to invest in unlisted loan notes issued by organisations that have a social purpose, albeit with much higher risk profiles.
ISSUER OF BOND YIELD SOCIAL PURPOSE
Ecotricity 7.00% Clean Energy
Places for People 5.00% Social Housing
Avante Dementia Care 5.00% Care Homes
Good Energy 7.25% Clean Energy
Green Pastures 5.00% Housing for Homeless
Scope 2.00% Disability Care
Table 6: Typical social bonds
Index Linked StockThere is a paucity of SRI investments in this sector. There are no SRI index linked funds, although it is possible to invest in index linked gilt funds which have a clear mandate of funding government expenditure.
It may also be possible to invest in index linked National Savings issues which likewise support UK Government spending, although this is dependent on the Government issuing stock.
The only true way to apply an SRI approach to index linked stock is to invest in specific issues of screened stock. These are somewhat limited and often have high minimum investment levels.
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MicrofinanceThis has become one of, if not the most, popular area for impact investing, having attracted nearly $13 billion in capital and provided credit assistance to over 95 million people globally. Its core principle is that of banking the unbankable – providing micro-loans to workers in the developing world who would otherwise be denied affordable finance for essential or productive purposes such as the purchase of a cow, medical or education expenses or for agricultural equipment. Loans are often made to women and on the basis of community collateral, whereby the individual borrower feels an obligation to repay by virtue of their place in a local community rather than to the lender. As a result repayment rates have been astonishingly high considering the lack of financial collateral and financial history of the borrowers.
New microfinance institutions (MFIs) are being established daily and existing MFIs are growing at the rate of20% per annum, with a consequent need for equity and debt finance. There are now multiple microfinancefunds which invest in microfinance institutions, both by way of debt and equity. Some of these invest in theless risky (but with less of a social impact) institutions and others focus on the higher risk, but high social impact microfinance bodies.
Microfinance enables small traders like these to earn their way out of poverty
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PropertyThere is a wealth of property funds and stocks, but the vast majority of these have no social underpinning or substantive environmental management policies. However, there are a considerable number of closed end funds that do manage their environmental and social impacts, especially real estate investment trusts. We’ve identified a number of leaders who have made sustainability an integral part of their property assessment and have demonstrably reduced the environmental impact of their portfolio through initiatives such as green leases, biodiversity action plans and waste recycling programmes. This includes UK , North American, European and Australian property trusts. All of these operate on a highly geared basis.
The above trusts invest in commercial property including shopping centres, offices and industrial buildings, but it is also possible to be more specific by investing in certain sectors that have a social purpose. These include medical property (purpose built GP surgeries, dental centres and hospitals), care homes, and student accommodation. Through bonds, it is also possible to invest in housing associations providing socialhousing, and in schools.
There are also unlisted investments that have a high social impact and of course, an investment can be made directly in property used for a social purpose such as affordable housing.
PROPERTY INVESTMENT TYPE SOCIAL IMPACT
MedicX Investment Company
Fit for Purpose Primary Healthcare
British Land REIT Manages environmental impactof commercial property
Sarasin Sustainable Equity Real Estate
SICAV SRI criteria applied to stocks
Ethical Property Company Unlisted Company
Supports charities and high environmental standards
Equfund IPS Restoring empty homes
Circle Housing Association Bond Affordable housing
Table 6: Typical social bonds
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InfrastructureInfrastructure funds fulfil a clear social need in that they provide much need finance for public facilities suchas hospitals, police stations, schools, colleges, fire stations, leisure centres, railways, courts, prisons and social housing. However, the majority of infrastructure funds invest in less socially defined projects such as roads, utilities and airports. Like all thematic funds, scrutiny of the portfolio is therefore essential.
There are also a growing number of environmental infrastructure funds that invest in solar, wind and waste recycling facilities. These generate high levels of income that are backed by reliable and Government backed revenues so have proved attractive to institutions.
Funds are available as investment trusts listed on the London Stock Exchange and it is also possible to investin environmental infrastructure via venture capital trusts and enterprise investment schemes.
New Earth Recycling Services – an infrastructure fund
CommoditiesCommodities represent a way of diversifying risk through investment in assets such as gold, oil and wheat, and can be accessed via low cost exchange traded funds. We don't consider these to form part of the 3D investing universe as they represent trades rather than long-term investments and don't generate wealth in themselves - they are little more than speculation on an increase in price and as such don't fit in to a socially responsible approach.
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Unlisted InvestmentsMost impact investments are not listed on a recognised exchange and are highly illiquid. As noted previously, impact investments form the 'cutting edge' of the social investment universe and make a high social impact by funding one or more of:
• Social enterprise• Essential services for the global poor• Sustainable agriculture• Clean energy• Clean technologies• Fair trade• Microfinance• Ecological services• Sustainable property• Affordable housing
Investment takes the form of private equity, whether directly in companies or indirectly through closed-ended funds; unsecurred debt via loan notes or loanstock; or sometimes as a shareholding in a mutual society such as an Industrial & Provident Society. Given the high risks associated with this form of investment, extensive due diligence is necessary, but it forms an important part of 3D Investing as it gives the investor a much closer interest in their money.
Abundance Generation – linking people with renewable energy projects
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INVESTMENT PROS CONS
Collective Funds ► Investor Protection & Regulation
► Wide range of funds
► Diversification of holdings
► Liquidity
► Professional Management
► Set SRI criteria
► Limited equity income funds
► Can be uninspiring
► Mixed performance
► Ongoing costs
Direct Equities & Bonds
► Control over SRI criteria
► Can select to meet specific financial strategies
► Stock specific risk
► High minimum investment levels on bonds
► Needs ongoing management
Direct Property ► Asset backed
► Low correlation with equities andbonds
► Income generating
► Illiquid
► Needs hands on management
► High level of investment
VCTs and EIS’s ► Can be offset against income fortax purposes
► Inheritance Tax relief
► Free of Capital Gains Tax
► May be underpinned by real assets
► High social impact
► High levels of risk
► Illiquid
Unlisted Investments ► High social impact ► Very high risk
► Illiquid
► Detailed due diligence required
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Tax ConcessionsThere are several ways of accessing 3D investments that confer valuable tax advantages including all of those that are generally applicable and some that are only applicable to social investments.
ISAsIndividual stocks, cash and collective investments can be held within an ISA wrapper for freedom from capital gains and income tax.
Venture Capital TrustsIn recent years, environmental infrastructure, and in particular wind and solar schemes, have featured heavily in the list of VCT offerings, as the contracted income flows are attractive given the income tax reliefs available. How long this will continue depends on the Government subsidies but whilst they remain, further fundraising issues are likely.
Enterprise Investment SchemesSimilarly, solar, biomass, hydro and solar schemes have raised finance through enterprise investment schemes, with the tax reliefs adding to their attractions. These include much smaller schemes run as mutuals.
Seed Enterprise Investment SchemesVery small companies can raise money through the seed enterprise investment scheme (SEIS). This offers very attractive tax reliefs but carries very high risks. A number of businesses with a high social impact have raised money in this way.
Community Investment Tax ReliefThe Community Investment Tax Relief (CITR) scheme was devised to stimulate the flow of private finance to support enterprise in the UK’s deprived communities. Investments may be inthe form of loans, equity or deposits (for those few community development finance institutions (CDFI) that are banks). Investment raised is then on-lent by the CDFIs to qualifying enterprises in designated deprived communities. CITR is available to any individual or company with a UK tax liability investing in an accredited CDFI, where the investment is held for at least five years. The taxpayer receives a relief to offset against their tax liability of 5% of the amount invested per annum, in addition to any interest or dividend paid by the CDFI.
Take-up has been quite limited, in terms of investment raised, the type of investors investing and the number of CDFIs actively participating. Only a minority of CDFIs are actually accredited to use CITR and the majority of total funds have been raised by only a few CDFIs. In 2012, 15 CDFIs were accredited to use CITR, down from a high 23 in 2005 and only £8.7 million was raised from 11 CDFIs against a target of £200 million.
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Social Investment Tax Relief
Tax relief for individuals investing in social enterprises will be introduced in April 2014. The new relief is intended to stimulate the social investment market, which has seen relatively low levels of investment, with only around £165 million of social investments being made in 2010.
In establishing this new tax relief the government intends to limit its availability to investmentsin existing regulated organisations operating social enterprises namely: charities, community interest companies (CICs) and community benefit societies. Unlike the existing reliefs for direct investment, it will not be limited to equity investments in shares, but will also be available to other types of investment (such as debt and quasi-equity) provided these meet the prescribed criteria.
The government is considering imposing a limit on the size of the social enterprise. There is also an intention to set criteria that must be met for the SITR to be available, with the underlying purpose being that the tax relief will be appropriately targeted at high risk investments. The criteria are likely to include that the investment is not secured in any way; isnot guaranteed; that no preferential rights are available to the investor on the winding-up of the social enterprise; and that returns on the investment do not differ substantially from a commercial rate of return. In addition, if the investment is eligible for tax relief under the SEIS or EIS then the SITR will not be available. The investment must be retained for a minimum fiveyear period (otherwise the relief will be clawed back) and individuals who are deemed to be connected to the social enterprise will not be eligible for the relief.
The maximum investment to any social enterprise on which SITR is available is likely to be limited to €200,000 in any three year period. The government have indicated that if the relief proves effective they may seek European Commission approval to increase the scope of the relief.
Income tax relief is likely to be available on a percentage of the amount of the qualifying investment, which may be deducted from an individual's income tax liability. A capital gains tax reinvestment relief will also be offered, to allow any capital gains tax to be deferred where proceeds from a disposal are reinvested in a social enterprise.
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Performance
Performance of ethical investments has been hotly debated for many years with no real consensus emerging. There are those that rightly claim that imposing an ethical screen limits the investment universe and that this will negatively impact performance. The counter argument to this is that excluding part of the market can actually be a good thing if it is unsustainable in the long term. Furthermore, by focusing on specific sustainability themes, it may well be the case that financial returns are enhanced due to the superior opportunities provided in these areas. So what is the actual evidence?
We analysed the financial performance of the 39 ethically screened open-ended UK mutual funds that have a 5 year performance record and are are not focussed on tightly defined themes (because these would skewthe results). As longer term track records are heavily influenced by shorter term performance (1 year performance lifts 3 year and 5 year performance), we looked at performance relative to the average fund in the sector over discrete 1 year periods over the 5 years to 31 October 2013. This shows that funds employing some form of ethical screening outperformed their benchmarks in 3 of the 5 years, leading to an overall out-performance over the 5 years. There are times when ethical funds seem to under-perform due to excluding part of the market, but this can also contribute to out-performance, and over the last five yearsseems to have done ethical funds no harm.
Performance of Ethical Funds relative to their benchmarks
Source: Data from FundsLibrary as at 31 October 2013
Looking at specific sectors, the UK equity growth funds significantly underperformed in 2008/9 during the financial crisis and marginally in the following two years, but has more than made up for this under-performance in the last two years in rising markets. The story is much the same for ethical global equity funds, except that the out-performance in recent times has been less pronounced and overall, they have underperformed their benchmark. Equity income, corporate bond and mixed asset ethical funds have all outperformed the average fund in their sectors over the 5 year period, only under-performing in 2008/9.
2008/9 2009/10 2010/11 2011/12 2012/13-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
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Table 7: Performance of Ethical Funds in IMA Sectors
IMA Sector 2008-2013 2008/9 2009/10 2010/11 2011/12 2012/13
UK All Companies 2.0 -4.1 -0.7 -1.0 1.7 6.2
Global -1.3 -2.6 -1.1 -1.2 -0.2 3.7
Europe ex UK 14.8 14.0 1.5 -1.5 -0.9 1.6
Sterling Corporate Bond 1.5 -1.5 1.1 0.3 0.6 1.0
Mixed Investment 6.8 -2.0 0.5 0.1 2.2 6.1
UK Equity Income 5.4 -2.9 2.0 0.5 2.3 3.4
Source: Data from FundsLibrary as at 31 October 2013
This all gives great credence to the notion that adopting an ethical approach does not necessarily lead to under-performance. What it does do is restrict the the investment universe and range of investments available. It precludes investment in many of the top-performing funds; it largely means avoiding passive funds and it makes it less easy to invest in specific markets such as Emerging Market debt, Japan or structured products. 3D Investing requires the investor to invest with a different lens that views financial performance as just one aspect of the investment strategy (albeit a very important one). However, the above analysis shows that adopting a 3D investing strategy can achieve comparable financial returns to the market as a whole.
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3D Investing Principles
Principle 1 – Its about more than moneyWe don't just see 3D investing as a business opportunity – we believe in it and invest our own money for social impact. Our prime motivation comes out of wanting to do something about the critical social and environmental challenges that we face and see 3D Investing as a key part of the solution where we can add value.
Principle 2 – It really makes a difference3D investing is the very antithesis of impersonal benchmark driven investing that characterises much of conventional investing. It is long-term, holds social impact as a core purpose and utilises capital to make something good happen that might very well not do so without investment.
“We do it because its right, because its one of the best ways of tackling social and environmental problems and because we want to re-engage with our money.“
Principle 3 – Investors are re-connected with their moneyTypically, non-professional investors have little real understanding of their investments and are distanced from their money, knowing very little about the underlying businesses that their money supports. In an increasingly complex financial landscape, even professional investors were caught napping when the financial crisis broke, not fully appreciating how profits were being earned and focussing on financial ratios that say little about the actual business. In stark contrast, 3D investing involves investment in businesses and organisations that investors understand and want to support. It represents a real partnership between investor and investee whereby money is clearly invested in known organisations that are making a measurable social impact.
Principle 4 – 100% of an investment portfolio can be invested for social impactMany investors put a proportion of their money in socially responsible investments, but to us, this is a cop out. If you hold social values, why wouldn't you apply them across your whole portfolio, rather than a smallportion of it? To do less, reveals a lack of conviction and there are sufficient options to adequately reduce risk. We can help you to deliver a portfolio service that allows all of an investors' assets to be managed according to a 3D Investing strategy.
Principle 5 – All investments need to be transparentOne of the reasons for the financial crisis was a distinct lack of transparency, leading to complex structures that few really understood. The hedge fund industry, banks and others claim a need for commercial confidentiality that leads to a 'black box' approach to investment. In the world of social investment, the need to see through each and every investment is paramount, since how can an investor really know if theirconcerns are being met without detailed information that describes each and every investment.
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Principle 6 - Social impact is a core principle. Its not good enough to simply avoid the 'bads' or to put a small amount of the portfolio in positively screened stocks. Within the given financial parameters, its possible to maximise social returns, albeit at different levels. This can be done in different ways. For example, when allocating to income generating equities, the investor can adopt an approach of actively seeking out those stocks that demonstrate clear social and environmental leadership, whilst for the high risk, high social impact component, impact investing is the most obvious solution, both of which fall within the philosophy of looking to maximise social impact within the given risk parameters.
Principle 7 – Ethical compromise must be defensibleSome level of ethical compromise is inevitable but must be justified and acknowledged. Management of risk invariably involves compromise, but in the spirit of transparency, we believe that any shortcomings should be acknowledged and declared, and if necessary, justified.
Conventional Investing 3D Investing
Short-term Trade Long-term Investment
Disconnected with individual investors Engaged with individual investors
Social Impact, if any, is secondary Social impact is integral to every investment
No new capital is introduced (other than new and rights issues)
Impact investment feeds new capital into social innovation
Investors are focussed on financial returnsalone
Investors are focussed on both social and financial returns
Low capacity to make a difference High capacity to make a difference
Low transparency – little detail on holdings
High transparency – full rationale for all holdings
Risk dictated by financial circumstances and personal outlook
Appetite for risk is also governed by a third factor: social impact
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Principle 8 – Investment can deliver a greater social impact than philanthropy3D investing complements philanthropy, since the impact investment element can achieve social change on a scale not possible by philanthropy alone. There will always be a place for outright gifts for emergency appeals, non-profit making ventures that can't be served commercially and for seed funding where the risksare just too high. However, impact investment can meet the needs of the poor and help to resolve environmental issues on a scale that philanthropy will never be able to achieve. Likewise, wider social investments can provide the level of finance necessary to deliver a more sustainable economy.
Principle 9 - Investments are not short term tradesMany portfolios operate on the principle of trading to take advantage of perceived underpricing, but in our experience the results of this are mixed at best. Timing is notoriously difficult and we therefore prefer approaches that do not rely on timing to generate long-term returns.
“For investors as a whole, returns decrease as motion increases” - Warren Buffett
Instead we like investment strategies that revolve around identifying and sticking with long-term investments that benefit from sustainable tailwinds. This is a low turnover, high conviction approach.
Source: LPL Financial, NYSE, 8/6/12
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Principle 10 – Maximising financial returns isn't the only objectiveThere is no doubt that excluding some investments on ethical grounds leads to a smaller investment universe and therefore the potential for profit. Furthermore, given that the majority of fund managers apply no form of ethical screening, the selection of funds is correspondingly limited and means that the vastmajority of top performing funds are not available. However, socially motivated investors are not usually preoccupied with maximising returns, but are more concerned to meet their broad financial objectives whilst also making a social impact.
Principle 11 – 3D Investments can be good investmentsIn any case, there is a substantive body of evidence (see 'Performance' above) that 3D investments are no better or worse than conventional investments. Like the wider market, there are good and bad investmentsand a 3D Investing strategy seeks to identify reliable investments that meet investor expectations. 3D investing benefits from sustainability tailwinds that provide a helpful backdrop for well-managed companies. The reverse is also true, in that sustainability strategies can help to avoid long-term headwinds.
Principle 12 – Income generation is important3D investing is not about speculating. As such, it often involves investing in relatively mature businesses that are generating cash and distributing these cash flows to investors. Dividends and income streams from real assets are therefore a really important component of overall investment returns. This gives more certainty than taking the risk of fast growing businesses that have not yet reached profitability. Income and the capacity to grow income is a key factor in choosing investments.
Impact of re-invested dividends on cumulative UK and US Equity Returns 1900 -2000
Source: Source: Triumph of the Optimists: 101 Years of Global Investment Returns, Dimson, Marsh and Staunton, Princeton University Press, 2002
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Principle 13 – Making money means not losing itIt only takes one bad investment to drag down the performance of the whole portfolio. Aside from impact investment where it's taken for granted that investment capital may be lost in its entirety, we prefer an approach where long-term preservation of capital is a cornerstone principle. In our experience, seemingly attractive direct investments in smaller companies ultimately prove to be less rewarding than larger companies or in managed funds focusing on specific sectors. We prefer to use funds for higher risk exposure, as this reduces the risk of capital loss associated with relatively small individual companies.
FTSE Aim All Share Index – A disappointing performance
Source: Selftrade 3 Dec 2013
Principle 14 – Listed Funds aren't the only game in townListed equities and bonds are the mainstay of most portfolios, and these are usually held by way of collective funds, but we believe that its important to look outside regular markets to benefit from the 'cutting edge' of 3D Investing and to truly diversify a portfolio. This might include unlisted bonds and shares, direct property or funds that aren't listed on main markets. These afford access to real physical assets and impact investments, that can provide both diversification and social impact.
It's also important to consider direct investment as opposed to investing via collective funds. Collective funds have the advantages of diversification, transparent performance comparison and competition that often leads to better fund management, but they carry the major disadvantage of inflexibility in the application of their ethical approach. This often means that funds hold stocks that fail to meet a socially motivated investors' concerns. There is a balance to be struck, but by combining direct investment with collectives, an investor can better realise their social objectives whilst maintaining financial discipline.
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Principle 15 - Attitude to risk is informed by social impactA socially motivated investor is likely to take more risk if they know that this will allow them to make a bigger social impact. In particular, they may well be prepared to dedicate a proportion of their portfolio to risky, high impact investments. The impact investor who can afford to lose capital is usually willing to trade social impact for an increased risk of capital loss. The issue is more one of taking good risks. No-one wants to throw their money away on a whim or ill-considered project. A risk is only a good risk if it is properly understood and accepted.
'Good' risks are managed and known
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3D Investment ModelSo what does all this look like in practice? Each portfolio is likely to be slightly different, and every investment manager has their own particular way of doing things, but given a clean sheet of paper, a model portfolio for an investor with at least £500,000 in investable assets might look something like this:
The exact proportions will vary according to market conditions, the investor's outlook and financial needs, but the above gives you an idea of our strategic thinking. The content will be governed by the investment manager, but might typically include the sort of assets detailed below:
CashThe bedrock of any investment portfolio. The choice of bank/building society will be governed by historical factors, but where funds are held for more than everyday purposes, an ethical institution might be considered such as Triodos Bank or the Ecology Building Society.
Fixed InterestThe range of collective funds is not extensive, but there are reasonable alternatives, albeit with limited social impact. The best of these have delivered a consistent performance and allocate a significant portion of the portfolios to organisations making a clear social difference. These funds can be complemented with a portfolio of direct holdings that meet the investors' specific income needs or social concerns. For example, social impact can be achieved through investment in listed bonds issued by housing associations, transport infrastructure companies, educational establishments and healthcare institutions. A high yield can also be achieved through investment in appropriate preference shares and Permanent Interest Bearing shares issued by building societies.
10%
10%
5%
5%
5%
15%
50%
5%
Cash
Fixed Interest
Index Linked
Microfinance
Social Infrastructure
Property
Listed Equity
Private Equity & Debt
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Index LinkedIndex linked stock can be used to counter the threat of inflation, but this is limited by the availability of suitable stock. There are no ethically screened collective funds and the range of suitable direct stocks is somewhat small, although there have been a few issues of index linked corporate bonds with a suitable ethical profile. However, assuming that investing in the UK government is acceptable, index linked gilts provide a solution. These can be accessed via funds as well as directly. It may also be possible to pick up index linked National Savings stock from time to time with the attendant tax advantages.
MicrofinanceMicrofinance is almost an asset class in its own right and is deserving of some exposure, not only for the significant social impact, but also for the asset diversification.
“MFIs may have useful diversification value for international portfolio investors able to diversify away from country risk exposures. The difference in market risk between microfinance and other emerging market institutions is based on a generally non-public ownership structure which reduces dependence on capital markets, lower international exposure of microfinance clients as well as lower operational and financial leverage.”
– Can Microfinance Reduce Portfolio Volatility -Nicolas Krauss and Ingo Walter 2008
Collective funds spread the risk associated with individual issues, with the best providers being able to demonstrate a proven track record and to fully document the social impact. Consideration should also be given to the currency risk, mix of equity and debt, geographic spread and liquidity.
Social InfrastructureAs detailed above, infrastructure is underpinned by long-term government incentives and contracts. This lends a level of certainty to investment returns and is therefore deserving of a place in an investment portfolio, and in particular, portfolios with a requirement for income where the inflation linked yields are especially attractive. Our preference is for listed funds that only invest in socially useful infrastructure, and these can be complemented by tax efficient investments in environmental infrastructure, such as solar, wind, biomass and waste recycling plants.
PropertyInvestors are already exposed to property through the ownership of their home, but there is merit in extending this if the investor can accept the illiquid nature of the asset class. It is possible to gain exposurethrough listed equity vehicles, although these are highly geared and therefore heavily reliant on capital
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markets and are subject to market sentiment. Direct property investment provides much greater diversification with the security of a real asset. If the investor has a sufficiently long-term time horizon, instead of just renting a property for commercial purposes, an investment can be made in property for the specific purpose of housing those in need, including bring empty homes back into use or accommodating homeless people.
Empty homes can be brought back into use
Listed EquityCollective funds help to reduce stock related risk, but direct investment in individual equities allows more control. A balance of diverse ethically screened funds with thematically driven collectives generally enhances social and environmental impact whilst not becoming overly dependent on specific industries. At the same time, a portfolio of direct equities can be run alongside the collectives to increase the yield, maintain a strong ethical profile and complement the funds.
Given the inevitable ethical compromise involved with general collective funds, it is important to identify managers that have the capacity to deal with these compromises which generally requires a specialist team.A high level of transparency with details on all stocks is essential, as is a well argued strategy. A mix of global, UK and emerging markets funds gives geographic diversity.
At the same time, exposure to global equities can be achieved through thematic funds investing in themes such as healthcare, clean energy, water and environmental technology. Some of these can be accessed on the form of low-cost, exchange traded funds. These funds are rarely subject to any form of formal ethical screening, so its vital to check them for any exposure to ethically controversial areas.
Our experience is that smaller company investment is best afforded through collective funds, since direct investment in smaller companies has rarely proven to be profitable. However, we believe that there is greatmerit in holding direct equities in larger companies on a passive basis. These are far less volatile and benefit from the compounding of dividends. We advocate compiling a short-list of high conviction stocks which can be held for the long-term and which are likely to be suit the vast majority of socially motivated investors. Conversely there are areas (see below) that need to be treated with a great deal of caution.
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INVESTMENT SECTOR CONCERN
Mining ► Too much controversy over human rights records and environmental Impact
Banks & Insurers ► Opaque businesses that rely heavily on gearing
Real Estate ► Reliant on gearing and capital markets
Commodities ► Speculative
Tobacco ► Kills people
Oil, Gas & Coal ► Climate change
Private Debt and EquityThis constitutes the impact investing part of the portfolio and offers a high social impact. Investments are typically highly illiquid, come with a high risk of capital loss and may offer below market rates of return, but they provide a way of investors making a direct social impact. Extensive and detailed due diligence is vital, with a focus on strong business models, experienced management, a realistic exit route and some form of asset backing. Funds offer greater liquidity and diversification than direct investment.
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Summary3D investing is an investment approach that combines a number of different socially responsible investment(SRI) strategies. It has a core purpose of making a social or environmental difference, but with the expectation that financial needs can be met at the same time. 3D Investing incorporates a wide spread of assets that goes beyond the usual equity/bond mix and in doing so, enables the construction of an investment portfolio that aims to deliver long-term financial returns whilst effectively managing risk and retaining a high level of ethical integrity.
3D Investing ServicesDeveloping a 3D Investing Service – Guidance and help with setting up and running your own service. We can help you to formulate a suitable strategy and provide you with the tools to deliver an effective service.
Listed Investment Research – Bringing pre-screened investment opportunities to your attention.We can provide access to our proprietary database of 3D investment opportunities to facilitate easy comparison and identification of potentially suitable investments. We can also save you time and money in eliminating investments that fail our initial due diligence.
Suitability Checks – Checking specific investments for ethical suitability. We aim to provide a response within 24 hours in most instances and assess the suitability of any stock listed on a recognised stock exchange.
Impact Investment Due Diligence - Independent research, analysis and profiling of impact investments. We provide unbiased and probing summaries of prospective investments. Reports on individual investments assess key risks and impacts in a disciplined and structured manner. These reports are available on a subscription basis. We also provide reviews of the financial, social and operational performance of investments. The aim is to keep you in the picture as to how impact investments are really faring and to alert you to any potential problems.
Initial Advice – Guidance, review of options and generic recommendations for investment. Theaim is build your understanding and to give you confidence in your 3D investing decision making.
Ongoing Monitoring – Checking the social performance of investments and updating stock profiles accordingly. Stocks are updated at least once a year.
Communication – Social profiles of investments, investment updates, sector reports, position papers, 3D investing online questionnaire
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About The Author
John Fleetwood is the Managing Director of EthicalMoney Limited and has 26 years experience in financialservices, 13 years of which was as an ethical specialistIFA. John has provided institutional ethical investmentresearch since 2002, having built a database of over1,000 ethically screened listed companies and morethan 150 SRI funds.
Whilst an IFA, John founded the Ethical InvestmentAssociation, the industry body for ethical IFAs.
After selling the IFA business he developed an EthicalPortfolio Management Service with asset manager, King& Shaxson. He also worked with female specialist IFA,Addidi, to offer an impact investment service called Make a Difference Investing.
As a founding director of The Cochabamba Project, he has helped to raise over £3.5 million for a groundbreaking reforestation project in Bolivia.
Closer to home, he set up The Gate, a charity managing a Kendal property for community benefit and working with a social enterprise to run a cafe training the long-term unemployed.
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The above report is provided for information purposes only and should not be construed as an offer of, or as solicitation of an offer to purchase, investments or investment advisory services. The investments mentioned in the report may not be suitable for all readers. If you have any doubts as to suitability, you should seek professional advice. No investment or investment service mentioned in the above report amounts to a personal recommendation to any one investor.
Your attention is drawn to the following risk warnings which identify some of the risks associatedwith the investments which are mentioned in the report:
• The value of investments and the income from them can go down as well as up and you may not getback the amount invested.
• The investments may not be suitable for all investors and you should only invest if you understand the nature of and risks inherent in such investments and, if in doubt, you should seek professional advice before effecting any such investment.
• Past performance is not a guide to future performance.• Changes in legislation may adversely affect the value of the investments.• The levels and the bases of the reliefs from taxation may change in the future. You should seek your
own professional advice on the taxation consequences of any investment.• There are additional risks relating to unlisted investments. These invest in non mainstream assets
where there is often no previous track record. In addition, many tend to be of a long term nature and illiquid. If you invest in a UCIS (Unregulated collective investment schemes), you may have no right to complain to the Financial Conduct Authority; or the Financial Ombudsman Scheme. You may also have no right to seek compensation from the Financial Services Compensation Scheme.
Copyright © 2013 Ethical Money Ltd. All Rights Reserved. The information, data and opinions (“Information”) expressed and contained herein: (1) are proprietary to Ethical Money Ltd and/or its content providers and are not intended to represent investment advice or recommendation to buy or sell any security; (2) may not normally be copied or distributed without express license to do so; and (3) are not warranted to be accurate, complete or timely. Ethical Money Ltd reserves its rights to charge for access to these reports. Ethical Money Ltd is not responsible for any damages or losses arising from any use of the this report or the Information contained therein.
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