BLOG: Introducing: The Spectrum of Capital

September 18, 2017 2:58 pm Published by
  • Every investment decision has an impact
  • Impact investment products sit on a wealth continuum
  • The sizeable universe of funds allows for constructing a diversified investment portfolio with a positive impact focus.

There is an impact dimension to every investment decision we (or our clients) make but traditionally we haven’t been able to quantify or understand what this means for mainstream investments.

We know that impact investing has been gaining momentum in the UK and overseas for the last few years and that it introduces a third dimension into investment analysis – assessing the societal and environmental impact of an investment alongside analysing risk and return. With impact investing, capital is deployed into companies or funds that seek to generate a positive impact – as well as positive financial returns and an appropriate risk profile.

So what is the impact universe?

There is a sizeable universe of funds available to UK retail investors that are targeting positive impact – across asset classes and impact category. Impact focus can vary across funds which are often marketed under similar banners – illustrating the need for adviser research and thorough product due diligence to understand the underlying specifics of each fund in the impact universe.

It is helpful to think of impact investment products sitting on a wealth continuum, from traditional investment – “Financial-only” – to philanthropy – “Impact-only”. The 2014 report from the G8 Social Impact Investment Taskforce, Asset Allocation Working Group, illustrated the landscape based on both investor financial objectives and impact (see below). The funds which map onto this spectrum, between the book-ends of ‘financial only’ and ‘impact only’ (charity and philanthropy), we refer to as ‘impact investment’ funds.

From an adviser’s perspective, when discussing the universe of funds available to a client who seeks to achieve some form of positive impact with some or all of their wealth, it is helpful to use the above graphic as a frame of reference. This presents the various impact categories on a continuum and uses familiar terms with descriptors of the identifying characteristics which typically differentiate these strategies. Funds can then be chosen from within whichever segment(s) best fit(s) an investor’s needs.

Matching client objectives in an unfamiliar universe

With this wider scope of the investment universe providing greater choice, construction of diversified investment portfolios with a positive impact focus are now possible. We believe this is an important step in bringing impact awareness to the mainstream and bringing the impact dimension into every investment conversation.

While it is true that the impact universe is growing, it is also true that investors do not have to trade off between realising positive impact and achieving competitive market rate returns. Investors have the opportunity to 1) hold diversified multi asset portfolios, 2) achieve competitive returns and 3) achieve positive impact through their investments. We believe such a proposition is compelling to many UK retail investors evidenced by various research reports that confirm high interest levels in impact investing likely to lead to increased growth over time.

Advisers have a requirement to consider the ‘whole of market’ and then demonstrate how they refine the choice to a recommendation that meets a client’s objectives. Worthstone is looking to provide information in the context of the whole impact market, as outlined in the Spectrum of Capital as above, and then provide useful analysis on opportunities within the spectrum to assist selection to meet investor objectives (see our UK Retail Impact Investing Review if you’ve not yet downloaded it).

With impact investing holding the potential to change the investment landscape for the benefit of investors and society we are excited for the developments ahead.

If you would like to find out more about impact investing and the launch of our next set of tools to help with due diligence in this sector, come along to our Social Investment Academy that will tell you all you need to know. Early bird discounts available until the end of September.

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