Impact investing has risen in prominence in investors’ consciences for a range of reasons, which each influence the approach that they are likely to take. Further, when it comes to investing for impact, investors have the choice of operating under a best-in-class, thematic or exclusion approach. The combination of both motivation and approach means that the mix of tools investors use varies greatly. Blanqué discusses the three most commonly used tools, the merits of these and their likely influence on portfolios.
Engagement is a lever used most commonly by investors incorporating ESG due to a sense of duty, Pascal Blanqué, 300 Club, stated: “Whilst ESG ratings are an exceptionally useful tool, we must go beyond. Being a committed player also means engaging with issuers on ESG topics and in constructive shareholder dialogue and exercising voting rights at general meetings.”
Divestment is a tool used more commonly in more extreme cases where investors feel that companies are unlikely to respond to engagement. However, this tool remains controversial. Blanqué said: “Exclusion remains a powerful sanction, but is not without its drawbacks.”
Thematic investing is an approach that considers the risks presented by ESG factors, such as global warming and poor governance, and then applying these to portfolios that explicitly aim to address these issues. Blanqué continued: “The 2015 COP21 conference in Paris and several environmental and governance scandals have provided stark reminders that portfolio managers need to be aware of risks beyond purely the financial.”
Managing the risks presented by ESG issues is prudent for asset managers that should be aware of the influence they have more broadly. It is now well accepted that considering ESG factors is not damaging for portfolios and so Blanqué advocates taking a mixed approach to ESG investment, for the benefit of investors and society.
The 300 Club members continue to publish a series of papers which focus on some of the challenges being faced, including dynamic asset allocation, risk management, manager selection, principal-agency relationship, long-horizon investing and client engagement. For further information, please visit the 300 Club’s website: www.the300club.org