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Future portfolio success will be built on impact

By Gordon Power

The volatility throughout this global pandemic has served as a blunt reminder of the vulnerability of our financial system to global shocks. Having spent 35 years in the private equity space, I have witnessed numerous economic cycles, but this downturn appears to be unique.

As we move further along the dreaded “second wave”, the main issue paralysing the finance sector is uncertainty. Concern over when consumer and investor confidence will return is widespread—and unfortunately, there is no immediate end in sight.

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While many newspapers are filled with doom and gloom, one positive trend should not be overlooked. We are witnessing an unprecedented shift in capital for the better 1. The coronavirus outbreak has served as a test of which companies will be most resilient to the next global catastrophes—climate change and biodiversity loss.

In the face of such challenges, family offices and institutional investors have been faced with the uphill battle of sustaining, preserving, and growing long term capital. The best course of action for family offices would be to build resilient portfolios that invest in companies which are suited to navigate global shocks.

Although many funds have experienced a period of great swings, impact investments have remained steady. Now, the penny has dropped. The Covid economic shock has woken asset managers to the reality that an impact investment strategy achieves both long-term capital preservation and growth. Over the past few months, the markets have witnessed an ESG [environmental, social and corporate governance] investment boom. Once viewed with suspicion, funds that place sustainability at their heart have proved their mettle and outperformed their counterparts during this financial crisis.

Speaking to the industry, the picture appears to be more robust in the private market with investors that specialise in sustainable investing. In my experience, returns from sustainable and impact investments have shown a 1.6x multiple increase over non-sustainable investments during the same period.

Although many analysts are predicting that the markets will return to normal once a vaccine has been found, they are forgetting that the future will not be plain sailing. We will certainly not return to the financial model of the past. With environmental disasters, dramatic shifts in energy markets and geopolitical risks emerging, funds that have demonstrated their resilience will do so once again. The pandemic has exposed dependency on fossil fuel-intensive companies and is providing an unexpected stress test ahead of the climate shocks of the future. As some businesses have demonstrated during this crisis, they are versatile and respond to market signals. Businesses must adapt by transitioning to resilient low-carbon alternatives.

Covid-19 has brought the sustainable investment case closer to the surface. The way we tackle the recovery phase will shape whether we are moving to a new global economic order with impact at the centre. Through value creation and investment allocation, family offices are a huge part of the green recovery. Fortunately, many are already acting, with a noticeable shift toward sustainable impact-driven investment strategies 2.

In a world where population is set to grow by approximately 30% over the next 30 years, there will be a vital need for 84% more energy, 60% more food and 55% more water. These macro-economic factors combined with a goring desire to drive towards a zero-carbon world over the same period means there is a huge opportunity for impact investing.

Let’s face it: the clock is ticking to address the climate and nature crises. The technology and awareness are there, yet our collective response has been too slow. More family offices, pension fund trustees and other institutional investors must seize the moment and collaborate effectively as we move into this new age.

It is all the more imperative, in today’s context, for investors to fully understand the impact of the investments they are making. For that reason, we developed our Earth Dividend™ process. It assesses the impacts, both positive and negative, of the investments we make. It guides us in selecting investments that will have a net positive impact and helps us work with those businesses to improve further the sustainability of their value chain. We see these steps as fundamental in today’s investment world. We need to understand what we are investing in and the impact it has, engage with management to improve that further on an ongoing basis and report out clearly what we are doing.

This moment represents a huge opportunity to drive forward major change in the financial system—family offices have started and must increase their activity by playing a crucial role in these developments. Covid is our wake-up call to start to drive a more sustainable and secure future.