Traditional Portfolio Construction Best Practices Still Apply When Incorporating Social Investments

LONDON--(Marketwire - Dec 11, 2012) - The UK is arguably one of the strongest markets for social investing: By one measure, social investing accounted for nearly 30% of total assets managed in the UK.

Nonetheless, institutional investors often don't know where to begin when they consider social investing, as the combination of the desired social impact and targeted financial goals make it seem a confusing and cumbersome space, says a new report by global investment advisor Cambridge Associates. 

According to the report, a traditional risk-to-return approach -- similar to that used in evaluating any investment -- is the best framework for evaluating social investments. But the framework needs to consider the "combined return" -- determining not only the financial impact but also the social impact of the investment, then converting the social impact into a monetary figure so that the investment can be judged on a risk-to-return basis. If applied, this expanded version of the traditional framework will allow institutional investors to add the appropriate social investments to their overall investment portfolios.

Barriers to Investing

The report outlines several barriers that prevent many institutional investors from engaging fully in social investing. Institutional investors are often reluctant to make social investments because of confusion regarding fiduciary duty, the belief that social investments will underperform, and unclear directives for evaluation, implementation and monitoring. The combination of roadblocks can be paralyzing.

In addition, the report says, there are other more logistical, industry-specific barriers: a lack of appropriate investment vehicles, a lack of informed gatekeepers, a lack of common social impact measurement standards, difficulty pricing social investments, and insufficient tax incentives. Even if an investor is able to develop a social investing program, he or she may believe there are insufficient industry resources to support it. This complicates the implementation plan.

Given these barriers, committees may not feel empowered to engage in this space, so the topic can get pushed off the agenda. Or, the entry point for the discussion is often "how much return am I going to have to give up?" But fortunately, as the report states, many of the perceived barriers can be readily addressed.

"Solutions to many of these challenges to social investing are immediately available," says Jessica Matthews, Associate Director of Mission-Related Investing at Cambridge Associates, co-author of the report. "Responsibility for these solutions should be shared by all market participants -- investors, advisors, and fund managers. Significant progress has been made in the past several years, evident in the development of social and impact investing networks, the establishment of social investment-focused groups at mainstream investment firms, and the proliferation of new funds seeking to generate both monetary and social returns. However, many investors still remain on the sidelines as they grapple with how to approach this somewhat new and unfamiliar field."

Approach to Social Investing

According to the report, important first questions for investment committees to ask are, "what are the goals and objectives of my organisation? Could and should our investment portfolio reflect our mission?"

If the answer to these questions is affirmative, implementing a social investment program should move forward -- with strategic planning and rigorous due diligence at the forefront.

"Traditional portfolio construction best practices still apply when incorporating social investments into the portfolio," says Annachiara Marcandalli, Managing Director at Cambridge Associates. "As with any decision, investors must clearly articulate the rationale for social investments. This important first step will help fiduciaries focus on the strategies that are most relevant to the institution's objectives. From there, investors should clearly define the role for each type of social investment, conduct rigorous manager due diligence, diversify among higher-risk opportunities, and evaluate returns relative to the risks of the strategy, just as one would when approaching any other type of investment."

The Elements of Sound Social Investment Decisions

The report illustrates how to implement a social investing program, using the traditional framework customized to focus on the considerations unique to social investing.

The exercise of evaluating investments through both financial risk/return and social risk/return lens informs the investment selection and sizing process. This combined financial and social analysis can also help investors determine how to incorporate the social investments into the strategic asset allocation -- by either integrating them into a portfolio's overall asset allocation targets or by viewing the social investments collectively as a separate asset class.

"Today, no responsible charitable investor can expect to address the social impacts of their investments by deciding only which shares they might wish to avoid. This means they need practical tools and frameworks that help them to chart a path through rapidly developing and sometimes unfamiliar territory," says Penny Shepherd, Chief Executive of the UK Sustainable Investment and Finance Association (UKSIF).

To view additional highlights of the report, please visit www.cambridgeassociates.com/pdf/pr/UK%20Social%20Investment%20Backgrounder.pdf.

To receive a copy of "The U.K. Social Investment Market: The Current Landscape and a Framework for Investor Decision Making," please contact Frank Lentini of Sommerfield Communications, Inc., at lentini@sommerfield.com or +1-617-939-9094.

About Cambridge Associates

Founded in 1973, Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. Today the firm serves over 900 global investors and delivers a range of services, including investment consulting, outsourced portfolio solutions, research services and tools (Research Navigator^sm and Benchmark Calculator), and performance monitoring, across all asset classes. Cambridge Associates has more than 1,000 employees based in eight global offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.