GLOBAL – Traditional portfolio construction best practices still apply when incorporating social investments, according to a report from London-based investment advisor Cambridge Associates.
A traditional risk-to-return approach – similar to that used in evaluating any investment – is the best framework for evaluating social investments, finds the report.
But the framework needs to consider the combined return – determining not only the financial impact but also the social impact of the investment – and then convert the social impact into a monetary figure so the investment can be judged on a risk-to-return basis, it said.
If applied, this expanded version of the traditional framework will allow institutional investors to add the appropriate social investments to their overall investment portfolios.
The report outlines several barriers that prevent many institutional investors from engaging fully in social investing.
Institutional investors are often reluctant to make social investments because of confusion regarding fiduciary duty, the belief that social investments will underperform and unclear directives for evaluation, implementation and monitoring, according to the report.
In addition, it says there are other more logistical, industry-specific barriers such as a lack of appropriate investment vehicles, a lack of informed gatekeepers, a lack of common social impact measurement standards, difficulty pricing social investments and insufficient tax incentives.
Jessica Matthews, associate director of mission-related investing at Cambridge and co-author of the report, said: "Solutions to many of these challenges to social investing are immediately available. Responsibility for these solutions should be shared by all market participants – investors, advisors and fund managers."
Highlights of the report can be found here.
In other news, Aviva Investors says proposals of the European Commission's Corporate Governance and Company Law Action Plan need to go further and mandate European companies to disclose how they manage their social, environmental and human rights-related issues and performance.
Steve Waygood, chief responsible investment officer at Aviva Investors, said: "European policymakers need to go further and include additional transparency requirements.
"Companies that conduct business in a sustainable and responsible manner are more likely to succeed over time and best reward investors. The problem is that the disclosure of corporate performance in this area is generally very poor, so we can't embed it into our valuation work."
Waygood called for a "proportionate and balanced" legislative framework that encouraged companies worth more than €2bn to publish material business sustainability information.
"This would help to raise the quality and value of businesses' CSR practices across the European Union," he said.
"This information should be integrated throughout companies' annual report and accounts and ideally also be put up for an investor vote. Companies not disclosing this information should be required to explain why."
Meanwhile, in the US, national non-profit organisation Environmental Defense Fund (EDF) has launched a new ESG management tool for the private equity industry.
Created in collaboration with specialist advisory business Irbaris, the tool aims to define the practices necessary to build a successful ESG management programme and a framework to assess, analyse and improve ESG management at private equity firms of all sizes.
Users of the Tool – which is free to download here – will be able to evaluate and enhance performance across 22 best practice areas.