WHEB’s Franks: Impact investing can connect finance with the real economy

Ted Franks

One explanation for why Britain came to vote for Brexit, and why so few predicted it, is that much of ‘Vote Leave’ resulted from a feeling of disengagement and disenfranchisement by a significant part of the population from ‘the establishment’.

As the gap in experience of the richest and the poorest in our society has stretched towards breaking point, we have witnessed the rejection of science and academia, the rise of Donald Trump and Marine Le Penn, and other social movements which have rejected the existing centres of power. Top of the list of targets are ‘big business’ and the finance industry.

Finance has become disconnected

Just as voters have felt disenfranchised from politicians, in a different way investors have become alienated from the industry that serves them. As investing has become more short term, it has become increasingly less about the business on which it is based.

John Kay (and others) have lamented the fall in the number of investors, who invest on the basis of business fundamentals and cash flows over the longer term, and their substitution by momentum traders and ‘the casino’, driven more by charts, share price momentum, and factors that are abstract from underlying business activity.

As a result it has often become irrelevant as to whether the company underlying an investment is making cans of beans or high-tech software. Savers have falling confidence in the economic basis on which their money is invested, and also of the impact it has on the world around them.

Impact investing can help reconnect

Impact Investing is a broad and heterogeneous area, but unified by a common thread which is that investments are intended to create social and/or environmental value, as well as financial value. Impact Investors are also expected to report on how they have achieved their positive impact.

The immediate assumption that this requires a lower financial return is wrong. Businesses that create positive value for society are arguably more resilient and will have stronger growth in a future world where they are answering demands from politicians, academics, the populace and consumers. Businesses and investors that fail to align themselves with this developing change in the economy and society are more likely to be those that miss out.

We have seen this demonstrated in practice in WHEB’s investment process. We actively seek high impact companies who make money by solving some of society’s biggest global challenges and in turn have seen the fund make both financial returns and a real difference to the future those investments are helping to create.

Ted Franks is a partner at WHEB Asset Management and fund manager for the FP WHEB Sustainability fund