It is better to invest your money in stocks that have a positive impact
Impact is one of the many aspects of responsible investing. As an investment approach, impact investing (a term first coined in 2007) aims to generate positive social or environmental effects – in addition to financial returns. More and more fund managers have investment teams dedicated precisely to this objective.
In doing so, they find the following:
An increasingly untenable focus on the tangible
If you compare US Steel’s financial reports today with those of 100 years ago, you will see little change: see The end of accounting and the way forward for investors and managers, Baruch Lev & Feng Gu, 2016. There has been little innovation in financial reporting, although a lot of legal jargon and risk disclosure and analysis has been added.
Despite this inertia, these reports are taken as evangelical. The resulting data is fed into models that produce valuations such as price / earnings and price / book. It may have worked 100 years ago, when most things of value were tangible.
But today’s businesses are often without capital. They invest less in physical assets and more in things we can’t touch, like patents and trademarks.
However, you will not find these investments reflected in a balance sheet. Don’t they exist because we can’t see or touch them?
False precision risks missing opportunities
Spending on R&D and marketing is an investment in future growth, but it is immediately recognized in a company’s income statement.
This removes profitability while the intangible assets created, such as software and brand value, never appear on the balance sheet. This underestimates the asset base. These companies are physically light in capital, not light in capital.
They are not magic, they are just different. The resources they develop must be nurtured and nurtured in order for them to be profitable in the future.
It’s no surprise that earnings and book value have lost their predictability of returns.
Increasingly, impact investors are focusing on measuring value. These are not short-term fluctuations in profits. These are the cash flows and profits that an investment will generate on its physical and intangible assets, including those that are not shown on the balance sheet.
This provides a realistic, representative, and cohesive place to start thinking about the relative attractions of a potential investment.
It is the intangible investments of companies that create value, by spending massively on R&D and marketing. The brands, products and services they develop may well reduce profits. But sometimes investors need to look to a more positive future.
History teaches investors that incumbent industries resist change, with the result that it occurs reluctantly and gradually, if at all. Thus, impact investors seek to buy stocks in companies capable of bringing about transformational change – and avoid those that cling to the past.
This has more than little in common with the idea of “disruptive innovation”. Put simply, new entrants may adopt new and superior technologies or business models that incumbents cannot or do not want to emulate, due to the damage they could cause to their existing business.
A digital transition may be happening in clothing printing. The dominant technologies in use today – rotary screen or automated carousel printing – involve multiple forms of preprocessing that are time consuming. This consumes energy, consumes water and often results in the release of dangerous chemicals into waterways.
Digital printing requires less manpower and physical space, it can take place closer to the market, and allows apparel production to be ‘localized’ in areas where environmental and labor standards may be. be monitored.
The scale of the opportunity is enormous. Can new clothing printing technology alone eliminate the waste and impact of the fashion and fabric industry? Absolutely not. But it can help make a bad situation much, much better.
This is just one of the myriad of potentially profitable investment opportunities – which also have a positive impact.
Matthew Beesley is CIO at Artemis Investment Management
Sustainable investment festival, June 22-25
Investment week Parent company Incisive Media will host its first Sustainable Investing Festival this summer, with speakers, innovative events and sessions to help investors navigate this rapidly changing area of the market. Click here for more information.