Ross Knowles, Chair of Ethinvest and Australian Impact Investments, explores the concepts of positive and negative screening and offers clear steps trusts and foundations can take to identify investments that run counter to their stated mission.
I established my Foundation around ten years ago because I believed that the natural environment was under a lot of pressure and I wanted to do what I could to help.
The Foundation has around $2 million invested so around $100,000 (5 per cent) will be granted this year to benefit the environment. That’s the Foundation’s total output, $100,000 granted to environment groups to do some good… Or is it?
Perhaps the bigger question is what effect does the $2 million of investments have on the environment?
That money is working to earn a return… but how is it doing that? Is it invested in coal mining, or other carbon intensive industries that counteract the overall environmental benefit provided by the grants – reducing the Foundation’s output…?
The first step I took was to look through the investments and decide if any are working contrary to the Foundation’s mission… In ethical investment circles, this is called a “negative screen”.
Negative screening has come into prominence recently with the growth of the fossil fuel Divestment Movement. This is simply a “negative screen” for fossil fuels. Prominent foundations such as the Rockefeller Brothers Fund in the US and institutions such as ANU in Australia recently attracted considerable media attention by pledging to divest a number of fossil fuel holdings.
The international Divest-Invest Philanthropy website now has signatories with $US 6 billion of assets pledged or already divested from fossil fuels.
Australia’s own Divest Fossil Fuels website has over $573 million pledged from foundations and super funds.
Signing up to the divestment pledge on these websites adds your voice and provides impetus to the divestment movement. Divestment seeks to change the dynamics in the global conversation about climate change by de-legitimising the self-interested voice of the extractive oil, coal and gas industries.
Ok, so now I’ve sold all of the investments that were working against my purpose… Is it possible to add to the Foundation’s environmental output?
The Divest-Invest Philanthropy website encourages its signatories not only to divest fossil fuels, but also to “invest” in renewable energy alternatives. This is what ethical investors would call a “positive screen”… investing in activities that are doing good for the environment, such as wind farms, solar farms and energy efficient technologies.
Such investments can also be called “impact investments” as they generate a positive environmental and social impact.
This approach increases the environmental output of the Foundation and most significantly, now we’re working with a much larger sum… up to $2 million can be contributing to change, as well as the $100,000 grant money.
What about the returns of these positive and negative screens and impact investments?
Do you necessarily sacrifice some of your return by investing in these investments? Well… No.
The evidence for the performance of responsible investment funds suggests it’s the other way around. These investments have generally produced a greater return than their market counterparts!
The recent benchmark report from the Responsible Investment Association of Australasia (RIAA) shows this in the following table. It compares responsible investment funds with mainstream funds for three major investment categories over different time frames.
Performance of Core Responsible Investment funds
(See the entire RIAA Benchmark Report here)
Impact investments are often individual projects, such as a wind farm or a community solar installation, so each investment opportunity is unique and has its own characteristics. The risks and returns need to be assessed for each project. Let’s look at an example.
The IIG Wind Trust (arranged by the Impact Investment Group) was a significant component of the funding mix for the Chepstowe Wind Farm. The Chepstowe Wind Farm project involved the planning, development and operation of a small-scale, 3 turbine wind farm, all from scratch.
The turbines have been installed on time and on budget and are now fully operational. The forecast financial return (IRR) is 10.3 per cent pa.
In addition to the financial return is the environmental return, or “impact”. This is the forecast annual carbon abatement of 25,195 tonnes of CO2, equating to an annual abatement of 1.55 tonnes of CO2 per $1,000 invested.
There is a 10-year off take contract with Hydro Tasmania for all of the electricity produced. The risks with this project could be viewed as similar to other infrastructure projects that involve development and operational risks, but of course they need to be assessed individually. (And this is not investment advice, just an illustration!)
What is the difference between impact and positive screen investments?
Impact investments can be defined as those that have “intent” to do good, make a financial return, and have measurable outcomes. According to RIAA, “Impact investing includes targeted investments aimed at solving social or environmental problems whilst also delivering financial returns.”
A positive screen doesn’t require “intent” or “measurement”, but from my Foundation’s point of view, the environmental benefit is the main point and positively screened and impact investments sit happily side by side… sometimes they’re one and the same. Financing a wind farm is a simple example of an investment that is both a positively screened investment and an impact investment.
How to get started
1: Review your investment portfolio to see if there are any investments that are working against your mission.
2: Decide on areas of investment where you would like to make a positive contribution, such as, renewable energy, recycling, or sustainable agriculture.
3: Take time to get good advice… recommendations by peers can be valuable, but make sure that any firm that offers advice in this area is a good fit with your organisation. The Responsible Investment Association of Australasia is a good starting point.
4: Get excited about impact investment!
Is divestment something for the too hard basket?
This depends on the structure and management of your portfolio.
It may be simple if you have a mandate with your portfolio manager and direct investments in Australian shares … or more complicated if managed funds are involved. At the very least it should be possible to require that each fund manager disclose the investments they hold on your behalf in different high-risk industries (from a social and environmental perspective, which adds to financial risk, of course).
A good advisor with an understanding of responsible investment will be able to help. Divest-Invest Philanthropy also offers helpful information in the resources section of their site.
Ross Knowles is chair of Australian Impact Investments. He also chairs its parent company Ethinvest, which he co-founded in 1989. He was the founding co-president of the Responsible Investment Association of Australasia, and was editor of the book Ethical Investment. He is a trustee of four charitable foundations (PAFs) including his own, which are all dedicated to addressing environmental issues. Ross is a keen environmentalist and has played a part in the protection of some significant Australian wilderness areas including Washpool National Park on the northern ranges of NSW and Yengo National Park north of Sydney. He has also discovered three new species of Australian frog, two of which are on the endangered species list.
Please note: the information and data contained in this article is not intended as financial advice. It has not been prepared with your attitude to risk, investment objectives, financial situation or needs in mind, and should not be used as a basis for making financial decisions or investment. If you wish to obtain investment advice you will need to speak to a properly licensed financial advisor.
Photo: Wayne Lawler, Ecopix