Impacting investing is the “ultimate step” in responsible investment, according to Federated Hermes’ Ingrid Kukuljan, who says the industry is witnessing an ongoing structural shift towards such investment strategies.
Responsible investing falls into the sustainable investment category, which in turn covers a variety of processes. Responsible, SRI (socially responsible investing), ESG (environmental, social and governance) and impact investing all fall under the sustainable investment umbrella.
Over the past few years as social awareness on major global issues has grown this has infiltrated financial markets, leading to increased demand for these more sustainable investment options.
The Investment Association (IA) said that a total of £36bn is now held in responsible investment funds, accounting for 2.7 per cent of the industry’s assets, accurate to the latest figures.
Federated Hermes defines impact investing as: “Investing in companies, organisations and funds which have the commercial purpose of solving social or environmental problems.”
What differentiates impact investing from the other areas is the quantifiable element, whereby a manager is able to show clients what the real world impact that that company is making, said Kukuljan, head of impact investing at Federated Hermes and manager of the $351.9m Federated Hermes Impact Opportunities Equity fund.
“I think that that’s very important because I see impact as the last stage in responsible investment,” she explained.
Kukuljan said ESG and sustainability are more of a risk-mitigation tool, whereby funds incorporate ESG and sustainability factors into a process with the view of avoiding companies which could damage shareholder value.
Impact investing, on the other hand, quantifies the real-world implications of an investment, said the fund manager, as well as shielding investors from risks.
“Obviously, sustainability and ESG are about risk mitigation and long-term value creation by taking into account the ESG factors,” she explained
“Impactful companies already have both of those components. You’re really looking at this last, ultimate step, whereby you quantify the impact. It’s about quantifying the net benefit to the society.”
Kukuljan’s “pure impact fund” is both style- and benchmark-agnostic and invests in around 30-40 companies, which must meet ESG criteria and have a quantifiable impact.
“If you look at our investment process, we need to be able to marry the impact side with the financial side and we will not invest in companies that do not meet both criteria,” she said.
One example of a company which doesn’t meet these criteria is Elon Musk’s Tesla, said Kukuljan (pictured).
The electric car giant has emerged as one of the best performing companies so far this year, having been supported by the markets favouring tech-oriented US growth stocks alongside increased interest in more environmentally friendly companies.
Tesla is the largest company in the FTSE Environmental Technologies 100, making up 11 per cent of the index.
Performance of Tesla share price over 1yr
Source: Google Finance
Kukuljan said the company’s positive environmental impact was undeniable, but the reason it isn’t held in her fund was because it failed to meet its ESG criteria.
“Tesla is in every man’s portfolio these days as far as I can see,” she said.
“In terms of impact you can’t fault it, it’s 100 per cent an impactful company. But our issues are obviously on the ‘S’ and especially on the ‘G’ side.”
Kukuljan explained: “We don’t see any alignment with minority shareholders. This is an issue which has been going on for a number of years, starting with his [Elon Musk’s] attempts to buy Solar City with Tesla’s money: that was his personal interest.
“The board isn’t independent. Even this year they were asked to produce a report on health & safety conditions, and they refused.”
Tesla’s valuation is also a concern, according to Kukuljan, which is just as important as its impact.
Although such disruptive stocks with a heavy emphasis technology have been among the best performers this year, Kukuljan has no exposure to the strongly performing FAANG group of stocks – Facebook, Amazon, Apple, Netflix and Google-parent Alphabet – in the Federated Hermes Impact Opportunities Equity fund.
Nevertheless, her fund has made a total return of 11.69 per cent year-to-date, outperforming both its sector and benchmark, as well as the FAANG dominated MSCI World index.
Fund performance versus sector & benchmark and MSCI World
Source: FE Analytics
Since taking over management of the fund in September, Kukuljan said she is constantly asked how she has managed to deliver such a performance without the exposure to the popular tech names.
“It’s because the companies we invest in provide products or services that are really interesting and support critical needs,” she said.
By investing in companies which are providing essential services and having a real impact, said the manager, the fund is exposed to enduring and sustainable sources of demand.
While sustainable investment strategies have seen increased interest in recent years as global social and environmental issues have been thrust into the spotlight, Kukuljan said that it would be wrong to say the theme has built up ‘momentum’.
“You know I wouldn’t call it the momentum I would call it a shift, and I think it’s here to stay forever,” she said, adding that all funds will likely have to take sustainability into account to some degree in the future.
“It’s no longer going to just be about the negative exclusions it’s going to be about which businesses are actually contributing and which ones are not.”