I’ve recently been reading Chris Budd’s excellent book about financial wellbeing (www.financialwell-being.co.uk). His key principle is ‘know thy self’ which means understanding what’s really important to you. To me, it makes sense that the way you invest money should reflect your values.

The problem

The Universities Superannuation Scheme (USS) has substantial investments in tobacco. About £211 million of the fund is invested in top 5 tobacco company British American Tobacco (BAT). Tobacco stocks have provided strong and consistent cash flow – they fit well with Defined Benefit schemes like the USS.

Cancer Research UK has identified smoking as the most important, preventable, cause of cancer in the world. In 2014/15 they made £238 million of grants to scientists working at hospitals and universities. These university scientists understandably found that the investment in BAT conflicted with their priorities when The Guardian brought this to their attention.

We need think about what we are putting in our portfolios and how it matches up with our clients’ values.

A range of tactics

At one end of the spectrum we can just avoid investing in things we don’t like. It’s relatively easy to analyse a portfolio and identify the underlying holdings from the funds. If we are keen to avoid tobacco we would choose not to invest in BAT and other similar companies.

A slightly more involved approach could be to choose funds that seek to influence the behaviour of the companies they hold. USS engaged with BAT to influence their marketing strategies – particularly regarding e-cigarettes.

Impact Investment goes further. Rather than avoiding areas, or trying to improve practices, it seeks to make an intentional, measurable, improvement to society or the environment. For an Impact Investor financial returns are equally as important as the impact they are having.

Putting it in practice

Traditional ethical investment focused on where you couldn’t invest or the least bad companies in a sector. For the USS scientists this would either mean avoiding tobacco or investing in companies that pay growers a fair price. This might be ‘less bad’ but it doesn’t really give satisfaction.

An impact investment approach would look at the root concern – stopping cancer. Some of the most promising advances have come from the biotech sector. Whilst a high risk in isolation, this could form part of a diversified portfolio and has produced excellent returns recently.

Not just for the concerned of conscience

Poorly managed companies tend to underperform well run businesses. At a basic level this might lead to avoiding fines or acting in a way that disengages customers. Both can have a negative impact on returns. ESG (environmental, social and corporate governance) analysis can help reduce risk in a portfolio.

Even unconcerned investors should consider investment in these ‘impact’ areas from a pure investment perspective.

You can do good and invest well. What do you think?

· Should we separate our investments from the rest of our wellbeing?
· What about passive investment strategies – can you truly combine your client’s values with this approach?
· Would you consider including this in your main portfolios?

To find out more have a look at http://eqinvestors.co.uk/advice/investing-with-impact-finance-as-a-force-for-good/

• Dan Atkinson was the 2014 IFP Paraplanner of the Year. He is a senior technical consultant at EQ Investors and is co-chairman of the 2016 CISI Paraplanning Conference. Follow Dan on Twitter via @DanAtkinsonUK.

— Dan Atkinson (@DanAtkinsonUK) April 26, 2016

www.eqinvestors.co.uk