By Ted Franks
One explanation for why Britain came to vote for Brexit, and why the London-based media failed to predict it, is that much of ‘Vote Leave’ resulted from a feeling of disengagement and disenfranchisement from ‘the establishment’ by a significant part of the population.
Average earnings are not growing and the gap between the richest and the poorest in our society has stretched towards breaking point with global events leaving many feeling insecure and out of control. In the wake of this we are witnessing a rejection of mainstream politics because it seems to be operating in its own bubble with a completely separate agenda.The political establishment’s inward focus has created fertile ground for discontent and left a big gap for the likes of Nigel Farage, Donald Trump and Marine Le Penn, and other social movements which reject these established centres of power. Top of their list of targets is the cosy relationship between big business, the finance industry and Westminster, which is seen to be self-serving.Finance has become disconnectedIn a similar way, parts of the investment industry have come to operate in their own particular bubble of quants, screens, shorting and momentum trading that often seems totally disconnected from the real economic activity which underpins it.John Kay[i] and others have called this the “financialisation of markets”. Whilst companies themselves invest in human, physical and intellectual capital with a timeframe that spans decades, at the extreme, their own equity might be traded in nanoseconds. As a result it has become almost irrelevant to the ‘fast money’ whether the company underlying an investment is making cans of beans or high tech software, representing little more than chips at the casino.In this environment savers and investors are right to ask about different approaches to the way their money is invested and the assumptions that are being made on their behalf.‘Impact’ as a source of risk management and returnImpact Investing is a broad and diverse area unified by a common theme, which is that investments are intended to create social and/or environmental value, as well as financial return. For many, the immediate assumption is that there exists a trade-off between financial and social capital implying a lower financial return.However, this is not necessarily true and there is both growing academic evidence and conviction within parts of the investment community that economic and social returns can be positively correlated[ii]. This is being recognised in economic theory and practice both of which can now make the case for sustainability as a source of competitive advantage.An important part of this is the increasing rejection of shareholder value in favour of stakeholder return. This shifts attention from a narrow focus on the short-term and bottom line, towards an appreciation of the needs of a wider array of stakeholders in the economic and social value chain, in order to create long-term value.In the wake of the financial crisis, Jack Welch, former CEO of GE and originator of the concept ‘Shareholder Value’ famously declared it to be ‘the world’s dumbest idea’.[iii]Institutionalising impactCritically, a long-term linkage between economic, environmental and social value is becoming institutionalised. For instance, Mercers are integrating ‘externalities’ like climate risk into their investment and asset allocation frameworks. One of their key insights is that these types of specific risk can spread right across asset classes and penetrate the capital structure[iv].On the upside these challenges represent a secular growth opportunity for companies that are providing solutions to environmental and social challenges[v]. There is also a growing body of evidence showing that strategically addressing environmental, social and governance challenges and opportunities is a sign of superior management quality which leads to company outperformance[vi].We have taken impact investing into listed equities by differentiating sustainability as a source of return across multiple sectors. In addition, we have developed Impact Reporting to quantify the social and environmental benefit that our portfolio companies are generating. This allows investors to start attributing both return and positive impact to sustainability factors[vii] and reconnects investors with the underlying economic, social and environmental value being created by the companies in which their money is put to work.Ted Franks is a partner at WHEB Asset Management and fund manager for the FP WHEB Sustainability fund [i] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bis-12-917-kay-review-of-equity-markets-final-report.pdf[ii] See http://reports.legalandgeneralgroup.com/2015/responsibility/introduction/group-chief-executive-s-review.html[iii] https://en.wikipedia.org/wiki/Shareholder_value[iv] http://www.mercer.com/our-thinking/investing-in-a-time-of-climate-change.html[v] http://www.whebgroup.com/media/2016/07/WHEB-Impact-Report_2015_v2.pdf p10[vi] Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financialperformance: aggregated evidence from more than 2000 empirical studies, Journal ofSustainable Finance & Investment, 5:4, 210-233, DOI: 10.1080/20430795.2015.1118917[vii] http://www.whebgroup.com/media/2016/07/WHEB-Impact-Report_2015_v2.pdf p17“The political establishment’s inward focus has created fertile ground for discontent and left a big gap for the likes of Nigel Farage, Donald Trump and Marine Le Penn, and other social movements.”
Ted Franks
