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In September, Barclays announced the launch of the Multi-Impact Growth Fund, the first impact fund to be launched by a major high-street bank.
Impact investing aims to invest in companies and funds to generate a measurable and beneficial social or environmental impact alongside a financial return. But does this new fund practise what it preaches?
It is encouraging that a mainstream bank has created an impact fund that is not just for institutional investors. Instead, the fund is aimed at the wider public, evidenced by the fact that the fund can be purchased for as little as £500 on Barclays’ Smart Investor platform.
As a well-known bank, Barclays is likely to have a lot of clout in making it accessible to a wide audience. But whether it succeeds in bringing impact investing to the masses will depend on whether it does it well or badly. These are early days, but so far, the signs are that the fund has not been selling like hot cakes: assets under management at the end of October stood at just £7.1 million.
The Multi-Impact Growth Fund is a ‘fund of funds’, which means that rather than investing in individual companies, it invests in other funds. The underlying funds include the iShares MCSI SRI tracker, Jupiter Ecology, Allianz Global Sustainability, Henderson Global Care Growth and also Impax Environmental Markets, a fund that is widely praised for its environmental impact by the ethical advisory community. The fund covers a range of assets across geographies, so is well diversified on that front.
However, close analysis reveals that one of the top funds in Barclays’ fund is Axa Framlington Human Capital, which in turn has a top holding in MTU Aero Engines AG. The company’s accounts show that 10.7 per cent of revenue in 2016 (equivalent to £500 million of revenue in 2016) is derived from military aircraft engines – arguably not what you’d expect to find in a fund geared to making a positive impact on the world.
We spoke with Damian Payiatakis, director of the impact investing business at Barclays, to find out more about the fund’s objective and selection process.
To select the funds included, Payiatakis says his team does due diligence on both the investment and impact processes of the fund. They meet managers and ask how they approach impact investing, and how they consider environmental, social and governance (ESG) issues as well as sustainability.
They also consider how impact is being monitored and reported by those funds, and whether the fund managers are active owners who try to influence the companies they own.
When asked about Axa Framlington Human Capital’s holding MTU Aero Engines AG, which produces military hardware, Payiatkis counters that the fund ‘is not an ethical fund’.
He equates ethical investing with having a ‘predetermined set of values and norms’ and he says this could include anti-gay or anti-abortion values, for instance, as ‘my ethics are not necessarily your ethics’. That’s why the Barclay’s fund does not use any negative screens, he says.
He says while solar panels might be considered ‘good’, the companies producing them could have ‘bad practices or use slave labour’. With this example he separates the goods and services produced by a company from its practices.
The separation is valid, and has previously been used against some environmental investments. But does a general retail investor who walks into Barclays with the aim to make a positive impact on society expect to invest in arms (even if the company has great gender equality)? Probably not.
Payiatkis explains that he needs to work within the confines of what’s available and regulated to a retail clientele, and makes the point that ‘impact investment now shouldn’t be judged on what it ideally could be.’
Matthew Coppin, manager of investment advice at ethical IFA Castlefield, says: ‘Although not an ethical fund, having a fund within its top 10 that has holdings within its top 10 that derives a large proportion of income from manufacturing fighter plane engines isn’t usually going to sit well with people in this space.’
He adds: ‘If you’re calling it an impact fund, you’d expect it to be cleaner than clean.’
Steven Pyne, managing partner and chartered financial planner at Holden Partners, agrees: ‘Generally, clients who want this type of investment don’t want military hardware.’ But he adds: ‘You often get these paradoxes if you don’t have a negative screen. Some investors might not totally be aware of that, so they’ve got to be careful about that.’
Coppin explains that there is ‘the older style of just negative screening which lends itself to more ethical investing, then there is the more forward-looking positive screening – looking for companies seeking to improve things in the future. In that sense forward thinking is commendable and is a good thing.’
But he suggests that at least a bit of both screens would need to be applied. ‘Perhaps if it [MTU Aero Engines AG] was a direct holding in the impact portfolio it would be easier to explain it from an [ESG] engagement angle, or even remove it for that matter, but it’s one holding in one of the funds, making management of these types of issues difficult if raised.’
Crucially, people trust managers and advisers to do the due diligence and make sure the investments meet the mandate they have set or the ‘impact’ being made in their name. After all, many people don’t have the know-how or the time to look into the holdings, which is why they employ an adviser or manager in the first place.
‘I see what they are trying to do, but am not sure that they have the naming or strategy correct,’ says Lee Coates, managing director at Ethical Investors. ‘We could use the fund if presented to clients as a responsible fund of funds, but it would be harder for us to promote it as a social impact fund. The best example of the latter is Aegon’s Social Impact fund – this really gets to the nub of social impact investing via equity investment.’
Coppin adds the Barclays’ fund ‘appears to have a focus on poverty and climate change,’ but the Axa Framlington fund focuses on human capital instead, via ‘small and medium sized companies, with above average score in human capital management, domiciled or listed in the European geographical area.’ However, Coppin says that ‘companies in the EU are investing in their employees regardless of where the profits are made to fund this.’ Overall, he argues, the focus of the fund is not entirely clear.
Other independent financial advisers who specialise in ethical and SRI investments argue that the launch of this fund sends a positive signal generally speaking.
‘Professional investors, such as pension schemes, have had access to a number of impact funds for years now. It is very good news to see a high street bank offering an option to its retail customers to invest in this type of fund,’ says Tanya Pein, an independent financial adviser at In2 Planning. ‘There is plenty of latent demand, and I look forward to other banks following suit.’
Lisa Hardman, director and chartered financial planner at Investing Ethically, says: ‘Our experience is that increasing numbers of people want their investments to have a positive impact (or at least to do no harm).’ However, she says that the Barclay’s fund is ‘not a 100 per cent ethically screened fund’.
She also points out that ‘the individual [underlying] funds can likely be accessed cheaper elsewhere but for Barclay’s clients the fund offers investors an opportunity to invest with a conscience and should therefore be welcomed.’
Pyne echoes the sentiment that it’s good Barclays is launching an ‘ethical product into the mainstream market – that’s going to give the world of environmental and social investing exposure.’
He says that people are cynical about banks, so this could be ‘another step towards making people more amenable towards the banking industry,’ but he adds ‘we’ll wait and see’.
Further, Pyne mentions that it remains to be seen ‘how many of these funds meet the standards of UN’s engagement programme’ and also ‘how the internal dynamics of Barclays [such as their corporate lending] matches the intentions of impact investing.’
As Coppin points out: ‘Barclays’ banking arm makes a substantial number of loans to large enterprises through corporate lending. This has included funding controversial projects in the oil and gas and mining sectors, and Australian offshore detention centres on remote Pacific islands.’
Coates agrees that one hurdle the fund faces is ‘the fact that it has been issued by a bank. There is still a great deal of ill feeling and mistrust of the banks, so some may well see it as slightly incongruous to consider investing in a fund issued by an institution that they wouldn’t consider investing in.’
Payiatkis emphasises that it is his intention to create a more ‘holistic view’ and integrate impact investing across all of Barclays’ work.
Coppin says: ‘They appear to have spent a lot of time and resources producing comprehensive and good quality impact investment framework.’ When it comes to measuring and reporting the actual impact created, Barclays might have ‘the oversight and the power to encourage a different type of behaviour and reporting. But will that actually happen?’
This article was originally published in Money Observer on 11 December 2017: http://www.moneyobserver.com/our-analysis/barclays-impact-fund-first-bank-should-it-be-investing-military-aircraft