Evaluating the merits of an impact fund goes beyond standard green scores to thoroughly reviewing the underlying thesis behind how and why the strategy will generate impact, researchers and advisers say
Zenith Investment Partners head of responsible investment and sustainability Dugald Higgins says from a researcher perspective they are going to analyse impact funds not from a manager or sector perspective but based on what the fund is trying to accomplish.
“Understand that and then look at how it’s doing it,” Higgins tells Professional Planner.
“Does the intent match the practice? That’s what we’re always trying to peel back. We’re not trying to grade everybody on how green they are, but if you’re going to claim you’re an impact manager only dealing in the secondary market in equities for example, well, we want you to defend that thesis of how are you going to be additive in adding impact in the world.”
Higgins says it’s becoming more common to see asset managers target healthcare for impact investing as it’s an asset class that ties into the UN’s Sustainable Development Goals.
Assessing the impact on healthcare is relatively straightforward, but in other potential areas of impact investing, such as in artificial intelligence, it is “a bit tricker because there are a lot of issues, potentially on the negative side”, Higgins says.
“Even if you move away [from] the ethical questions about it, just energy consumption is a big one,” he says.
“The broader statistics show if you ask ChatGPT a question it’s 10 times more energy intensive than just doing a web search.”
Nestworth senior financial planner Phillip Bures says it’s important to properly vet a manager as well as understand how it benchmarks the social cause it seeks to impact.
“Some of these can’t be quantifiable as much…we just want to set the expectation upfront with both the client and the fund manager as to what the outcome they should expect and sometimes it just takes a bit longer than a normal investment,” Bures says.
Bures says the process begins with the client coming to the firm with a specific goal or cause.
“We would first flesh that out, work out what the brief is…and why they have a strong social or emotional cause to that need to see if there is any available product to help them solve it,” he says.
“If we don’t feel comfortable with the investment, we won’t put it to them.”
Furthermore, Bures says the firm would go as far as letting the client speak with the fund manager or representative directly, so they can do their own screening of the product.
Bures says the advice firm reviews the track record of the provider, as well as the liquidity and benchmarking of the product.
“We wouldn’t want to deal with anyone that didn’t have a track record,” he says.
Centaur Financial managing director Hugh Robertson says care needs to be taken to avoid “impact washing” and to do proper due diligence on the investments.
“Generating financial returns as well as creating positive social and environmental change is not mutually exclusive with AI,” Robertson says.
“Our approach is via proven managers in this arena and thorough investigation. It’s a rapidly evolving space that requires constant attention. There aren’t a lot of impact funds available in Australia at the moment, but this will grow over time as AI takes more prominence.”
Bold Wealth director Dylan Pargiter-Green says the expected outcome must align with what the client’s investment preferences and goals are.
“With any impact investing or responsible investing, we will discuss with the clients what they’re trying to achieve by putting additional allocations or reducing allocations to an area,” Pargiter-Green says.
He says the investments are viewed through an opportunity/cost framework and that clients must be aware that impact investing could create short-term risks that affect returns.
“You can’t have everything; if you want one thing often there’s an opportunity cost to making that decision,” Pargiter-Green says.
“Impact investing, as an example generally, can have the opportunity cost of additional volatility or missing out on cyclical returns in other sectors, but you make that choice on the basis of trying to make a positive impact in the sector that you feel strongly about helping through your allocation of capital.”
Pargiter-Green says it’s also important to factor in whether the client’s desire for impact is better achieved by charitable donations, rather than investing.
“The way we talk to clients is we help them understand that your likelihood of reaching your financial goal and then being able to directly contribute is greater by having sound portfolio construction,” Pargiter-Green says.
