Impact investing is bullshit

Elizabeth Knight has a look today at impact investing and millennials:

Whether or not you subscribe to the view that today’s youth are an entitled, smashed avocado-eating, device-obsessed group, it won’t be that long before they move from being just consumers to being investors. And this they will do very differently from their parents and grandparents.

It seems these investors of tomorrow will have a more of a social conscience.

While companies and funds are now very tuned into the increasing use of the Environmental Social and Governance screening, Impact Investing takes it up a notch.

Rather than the ESG focus of ensuring the avoidance of investing in companies that produce a negative impact – on the likes of health, gambling or carbon footprints, Impact Investing looks to actively generate a measurable, beneficial social or environmental impact alongside a financial return.”

Elizabeth then goes on to talk about how impact investing is taking hold internationally.

My view is that impact investing is about as useful as clicking the “like” button on a Facebook post – there is probably some vague extremely minor benefit, but for all intents, you have done nothing.

What are the different types of ethical investment

There are three different approaches that different ethical funds use to select stocks:

  1. Impact investing: This involves finding companies that are actively contributing to causes that you feel strongly about. It might mean investing in a solar manufacturer, a biotech with a potential cure for cancer or an electric car manufacturer.
  2. Negative screening: This involves excluding companies that do not meet ethical standards. It may mean not investing in any companies that are involved in tobacco, that produce carbon or that make weapons.
  3. Best of breed: This involves ranking companies on a range of metrics and excluding those that don’t meet particular standards. For example, a carbon/global warming strategy may exclude companies involved in brown coal or tar sands (generally considered the most polluting) but include companies that produce natural gas as it pollutes less.

Impact investing is difficult – finding stocks that are good quality and cheap is hard enough. If you find a stock with very positive ethical characteristics that is only average quality and the stock is very expensive should you buy it anyway, expecting a poor return?

Negative screening needs to be customised, which makes investing in an ethical fund difficult. One investor may think that tobacco is a terrible additive product but gambling is an individual’s choice. Another investor may have exactly the opposite view.

Best of breed can be similarly problematic. If you don’t want exposure to fossil fuels, then holding a gas producer with the view that it is “the least damaging, and it is cheap and so I think I can profit from it” can seem hypocritical.

The problem with impact investing

Finding a company that is good quality, cheap and will positively benefit society is incredibly difficult – it is rare to find two of those qualities and so getting all three together is next to impossible. 

My weakness with impact investing is that I’m a sucker for a good biotech or green technology story. Hearing these companies talk about how they are curing this disease or that, seeing the pictures of the kids who will be saved if their drug/device works, hearing about how this new technology will produce cheap, clean energy can be an uplifting experience.

“Not only will my investment make me money, I’ll be saving sick kids/the world from global warming!”

If you ever get the chance to hear some of these presentations, its hard not to be moved.

But the focus is rarely on the value of the proposition, its all about the technology/good that it is doing. And that’s a recipe for losing money on an investment. Losing funds don’t last that long.  

What are you trying to do? 

If there is a cause you are passionate about and you want to support companies in that area, there are four ways you can support that cause, in order of most helpful to least helpful:

  1. Make a donation. Are you trying to help or are you trying to make money? If it is the first then by donating you can feel good straight away, you get a tax deduction up front (rather than waiting to book a capital loss when you sell shares!).  Donating directly to companies is not generally tax deductible – but I’m guessing if your cause is ethical then there will be industry bodies that are tax deductible.
  2. Buy the product yourself. Most companies want more customers rather than more shareholders – and the ones that don’t you shouldn’t be investing in.
  3. Buy shares from the company in a capital raising. That way your money will actually go to funding the company expand or its research and development.
  4. Buy shares on the market. This is the least helpful way of helping the company. All you have done is transferred money to another investor. 

Net effect – impact investing is the least useful way that you can help a company and will probably cost you investment wise.

My advice to maximise the social/environmental benefit of your money:

  1. Don’t let your investments don’t make the world worse. Find an investment product that avoids stocks that align with your values or use an investment manager like Nucleus Wealth that allows you to customise your ethical choices.
  2. Use your money to make the world a better place. Make donations to important causes, buy products that you want to support, support politicians trying to make changes.  

And acknowledge that impact investing (or clicking the like button on Facebook) should not make you feel like you are contributing to a cause in anything but the most minor of ways.