Responsible investing is a balance between financial and social return

Conan McKenzie
Director and Portfolio Manager – BlackRock

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

A core principle of all charities is to have a meaningful and positive real-world impact. That is why they exist. Conan McKenzie, portfolio manager of a range of multi-asset charity funds, believes that this also has to be true of how they invest.

“We want to invest our clients’ money in a way that’s consistent with their values and how they would be investing it were they to manage it directly themselves,” he says. “We have a fiduciary responsibility to our clients to grow their assets.”

Negative screening plays a role in order to make sure investments don’t contradict charity client’s values, and to help build trust among their stakeholders, says McKenzie.

“Some companies and sectors do have negative social impacts and obviously we don’t want to contribute to that, so we apply negative screening to our portfolios. But negative screening on its own won’t change the world."

“What is much more exciting is thinking about how we can have an impact on the real world through the investments that we make.”

When it comes to measuring real-world impact, benchmark comparisons and quantitative data around carbon emissions, for example, provide some indication of a portfolio’s performance on environmental, social and governance (ESG) metrics.

Risk: The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

However, McKenzie believes that by investing directly in primary markets you can witness much more tangible effects.

He adds: “Giving money directly to the company or infrastructure vehicle increases the amount of capital they have in order to have a real effect in the world. The key is to be concerned not only with financial market data, but also with real-world data; looking at what has positively changed as a result of investment decisions.”

Positive inclusion

One area of investment that exemplifies this strategy is in renewable energy, says McKenzie. In 2013, BlackRock invested through its charity funds in the initial public offerings of two solar energy infrastructure vehicles, and has since expanded this to other investments in wind and hydro power generation.

“It’s a great example of how your investments can help drive change. We can point to solar and wind generation assets that would not have been built if we had not directly invested in these vehicles. Now these renewable energy assets exist and are plugged into the UK and European power grids.”

From a financial point of view, the investment case is also pretty compelling. “When we were looking at this nine years ago, there was a lot of discussion around having to sacrifice financial returns in order to have a positive impact, as opposed to say the margins involved in investing in existing utilities companies using coal or gas power generation. But in fact, the opposite is true. Wind and solar are proving extremely profitable, whilst giving inflation-linked income for our charity funds. So not only is it the right thing to do, it is also very aligned with the financial goals of our charity clients.”

These types of investments are also extremely stable, says McKenzie. “Our goal as an investor is to try to diversify to reduce risk. However, finding true diversification can be hard. What’s great about investments in renewable energy, is there is no correlation between how much the wind blows or the sun shines in any one year with how markets perform. So, you are getting genuine, long-term diversification, which helps contribute to a smoother journey for charities in terms of growth and income.”

Risk: There is no guarantee that a positive investment outcome will be achieved.

Building trust

Although investing in renewables has now become much more mainstream, back in 2013 it was newer for investors, notes McKenzie.

“At the beginning, it did make some people nervous. But we have been doing this for nearly a decade now and have shown that it can work. We have been able to build up trust with our charity clients and create long-term relationships.”

Investor purpose

Over the years, other investment companies have followed suit and McKenzie says that is good thing. “A pound invested by one of our peers can have as much of a positive impact as a pound invested by us."

“Ultimately, the purpose of the investment industry is to take capital from people who own it and want to grow it over the long term, and to provide it to people who can use it in a way that is productive for society and for the world as a whole."

“That’s what we are here to do. If we invest the money from our charitable clients, and direct it towards companies which can use it productively in the real economy, to generate not only social return, but also a financial return for our clients, then we’ve done our job.”

This article was written in partnership with Civil Society Media