The 2020 Worthstone Impact Investment Academy

Author: Karl

The 2020 Worthstone Impact Investment Academy- Positive progress in troubling times


On 17th November, Worthstone, the UK’s first targeted impact investment resource platform, held their annual Impact Investment Academy. As one of Worthstone’s founding members, many of the BpH Wealth team look forward to attending this every year, albeit this year the event was held remotely. It is a fantastic event to find out about the progress the industry is making in the Environmental, Social and Governance (ESG) and impact investing space.


This year, as with so many other events, the effects of Covid-19 took a substantial amount of airtime. But unlike many discussions of the pandemic, the day provided a more balanced look, pointing out how much good, as well as bad, has come out of the past year. Here are some of the highlights and interesting points made at this year’s conference.


The news is often dominated with controversies about malpractices of big companies; environmental damage, poor working conditions and CEO’s getting huge salaries and bonuses while staff are being cut. It can seem like we have no control over the damage and unfairness perpetuated by large companies all over the globe. However, this is what impact and ESG investing are all about.


This year there were many mentions of companies that were attracting investment from socially responsible funds. These are companies that are addressing society’s greatest challenges and genuinely working to make the world a better place.


New innovations

Socially responsible funds started as merely exclusionary, meaning they did not invest in certain companies, like tobacco or oil, on moral grounds. Now, the world of socially responsible and impact investing is moving forwards quickly.


Newer products like systematic ESG funds allow investors to incentivise change by investing more heavily in companies with the best ESG credentials in each industry. For example, of all fossil fuel extractors, BP is regarded as having some of the best commitments to reduce their environmental impact and so is rewarded with greater investment, the worst offenders would receive little or no investment from a systematic fund.


While systemic funds themselves have been around for a few years now, it was encouraging to hear about the latest products and innovations that some funds are investing in to have a real impact on the world’s problems.


Quite from Antonio Guterres, Secretary General of the UN- “We must look beyond the current crisis and set our sights high… to show that transformation is possible”

A main focus this year was not of innovations to the funds themselves, but to measuring the impact that a fund may have. This is a key part of the impact investing space, as there has been much controversy about certain companies and funds ‘greenwashing’, i.e. withholding or using misleading information to give the impression they are more sustainable than they actually are. For socially responsible investing to become mainstream, people must be able to see the impact their money is having and know they are not being misled.


Measuring the impact of a fund is complicated, and methods are still in their infancy. For many social and governance considerations, value judgements often have to be made to be able to ascribe a number to a fund’s impact. However, Worthstone and others are coming out with promising new methodologies to rate and compare the social and environmental impact of funds. Although these methods are still in their infancy, it was exciting to envision the world we are heading towards; where the direct social and environmental impact of every fund can be measured and compared.


The Impact of Impact Funds

Aside from learning about progress in the industry, the event was also a great opportunity to look at the kind of businesses that existing Impact funds are investing in. Impact investing has a greater material impact on the world than ESG, but will generally diverge more from market returns. This is because impact funds have themes such as climate change or improving healthcare. Impact funds pursue these themes by investing heavily into businesses that are really making a difference. These are businesses that are world leaders in solving some of the world’s greatest challenges.


To give you a taste of the kind of businesses that we learned about, here are three examples.


Dexcom

Dexcom is a medical technology firm that is pioneering continuous glucose monitoring technology for people with diabetes. Type one and two diabetes together are estimated to cost the world $2.5 trillion per year by 2030, and this number is only rising. Our own NHS spends over one million pounds per hour treating diabetes patients, which amounts to around 10% of its budget, this is estimated to rise to 17% of its total budget by 2035. 80% of the cost of diabetes is due to avoidable complications, which Dexcom’s products could help avoid. Continuous glucose monitoring is estimated to reduce the average annual cost of healthcare for US patients by around 30%, from $17,000 to $12,000.  

Not only does this new technology save money for individuals and healthcare organisations across the world, but it can make a huge difference to people who have diabetes. Continuous monitoring of their blood sugar allows them greater freedom and flexibility to live a more normal life with the knowledge that they will be notified if their blood sugar levels are getting too low before it becomes critical.


Brambles

Brambles is a supply chain company that uses reusable packaging for the storage and transport of goods around the world. They supply packaging at the start of the journey and pick it up at the destination. This not only reduces the cost for businesses, who would normally use new packaging every time, but has a huge impact on the environment. In one year, Brambles estimates it saves the equivalent of 1.8 million trees, 2 million tonnes of CO2 and 1.6 million tonnes of waste.


John Deere

John Deere is well known for tractors and other farming equipment, but lesser known is their commitment to addressing one of the world’s greatest challenges, food production. The company invests around $1bn per year on research and development of ways to improve crop yields while reducing costs. They are working on several innovations including using sensors, cameras and data analysis to do this.


One recent innovation is using smart cameras on tractors when spraying pesticides. Their new technology means pesticides are targeted at weeds where before the whole field would be sprayed. This reduces pesticide usage by up to 80%. Not only does this slash the cost of food production, but it also means less chemicals that are disruptive to the ecosystem are used.


Engagement and Stewardship

As well as investing in companies that are helping create a better world, a growing part of ESG and Impact investing is engagement and stewardship. This is when representatives of the fund communicate directly with businesses to convince them to adopt more socially desirable outcomes.


Engagement and stewardship of companies is not only about representing investors’ interests to companies, but the interests of all stakeholders. Representatives of a fund will learn about different industries and what can be done to make them more sustainable and socially conscious. A fund will build a relationship with companies and encourage them to put less weight on short-term profits and market movements in their decisions, and instead focus on a longer-term perspective. Businesses are encouraged to work towards a better future, both financially and for society.


This all sounds good on paper, but you could be forgiven for thinking this sounds too idealistic. Talking to businesses is one thing, but words becoming actions is another. However, the results from one study shown to us seemed to show some positive signs. BMO Global Asset Management surveyed the businesses they worked with about their engagement:


  • 68% of the businesses BMO had engaged with claimed that their engagement had increased their awareness of the United Nation’s Sustainable Development goals and which to target for their business.
  • 53% believed that BMO’s engagement had helped develop greater internal buy-in for addressing the social and environmental issues they had raised.
  • 47% of respondents said that BMO’s engagement had driven material change within the organisation.

While these numbers are encouraging, there is clear room for improvement. It was reported on the day that some businesses approached by the funds simply do not want to engage, which could pose problems for the future. The hope is that as ESG funds become more popular they are likely to have a larger impact, as they will represent a larger proportion of investors in businesses.


It was also encouraging to hear about new and upcoming changes to regulation in the UK that will lead to transparent reporting on stewardship and engagement, meaning funds will find it harder to hide if they are not living up to their commitments.


Reasons for optimism

In times such as these, it can be hard to find any silver lining. However, the Worthstone Impact Investment Academy gave many reasons for optimism.


Although the pandemic has halted or reversed progress on many of the United Nation’s Sustainable Development goals (seen below) such as ‘no poverty’ and ‘access to education’, many have been positively impacted. The most positively affected goals have been the ‘provision of affordable and clean energy’, ‘industry innovation and infrastructure’ and ‘sustainable cities and communities’.


The United Nation's list of Sustainable Development Goals

The UN’s Sustainable Development Goals. Source: United Nations


The day painted a picture of a long and challenging road ahead to a fairer sustainable world, but also examples of innovations to deal with some of humanities biggest problems on the horizon. Technologies to tackle climate change, cheap and sustainable food production and cheaper healthcare through better understanding of the human genome are advancing rapidly and will have a part to play in the times ahead.


Quote from Gillian Tett, editor of Moral Money at the Financial Times- “Revolution happens when the silent majority see it as in their interest to join in, we are now approaching that tipping point”

In the last session of the day, Gillian Tett, the editor of the popular Moral Money newsletter by the Financial Times said this- “Revolution happens when the silent majority see it as in their interest to join in”. She claimed we were approaching that tipping point now. Companies are beginning to ask themselves what their purpose is in society, and consumers and investors are starting to demand businesses take better care of the world around them.


Businesses, investors and governments are beginning to ask if they want to be part of the problem, or part of the solution, to see the world through more than just the lens of profit, returns and economic growth. We are beginning to recognise that these things so often have a trade-off, and work is being done to build these into decision making from the smallest to the largest scale.