INVESTING FOR IMPACT
Foundation Scotland EQ Impact Portfolio
Since November 2020, Foundation Scotland has invested the funds we manage in a socially responsible way, enabling us to be true to our purpose as a community foundation.
Moving toward a stronger ethical position through investments means using our capital, not just the financial returns it generates for grantmaking, to achieve social and environmental good. We are taking a responsible approach to support people and planet, sustainably.
A focus on short term profit objectives has contributed to the social and economic inequalities affecting communities and societies throughout the world. The thinking behind positive impact investment is that investments can be utilised to help solve these problems, by investing in companies that serve a useful social purpose as well as deliver a profit, and in companies that are run in a socially responsible way.
Historically Foundation Scotland worked with a third party to manage investments. However, once we moved to positive impact investing, we appointed EQ Investors following a rigorous selection process.
Our portfolio
At present, the Portfolio owns 15 impact-focused funds which, combined, hold stakes in approximately 400 companies. Each fund has a particular focus, for example, one focuses on water and waste disposal, another on healthcare, and another on biotechnology. As a result, the Portfolio is very diversified, limiting exposure to any one investment, with no individual company representing more than 2.5% of the total portfolio.
Unusually for a charity, we requested that equity funds only be included as we believe equities will be more likely to produce superior returns and provide a better hedge against inflation too. We also want our impact portfolio manager to be totally unconstrained in buying funds that have a truly global, or at least regional, perspective. A vast majority of the world’s most impactful companies are not UK listed ones, and we were keen that performance would not suffer from a traditional local bias.
Some examples of companies that these funds are invested in include:
- Trane Technologies designs and manufactures highly energy-efficient heating, ventilation, and air conditioning (HVAC) systems, including heat pumps. Trane’s HVAC equipment also uses digital controls, which provide the data to feed building automation systems which can then help optimise energy use, and thus lower carbon footprints.
- Bank Rakyat is one of the largest Indonesian retail banks. The company specialises in the provision of financial services to micro, small, and medium sized enterprises. It’s committed to increasing financial inclusion using modern digital banking to facilitate microfinance lending across its network of over 10,000 branches.
- Intuitive Surgical is a medical technology company specialising in robotic-assisted surgical systems, notably the Da Vinci system. This enables minimally invasive surgery, enhancing precision, control and visualisation for surgeons across various specialities, ultimately benefiting patients with quicker recovery rates.
- Trimble provides technology for agriculture, construction, and logistics industries, to optimise efficiency and resource use. For example, its software and sensors enable precision agriculture which helps farmers reduce fuel consumption, waste, soil compaction and pesticide usage.
- MercardoLibre is Latin America’s leading e-commerce and fintech platform. It provides an online marketplace for buyers and sellers of products. It also has its financial services arm Mercado Pago, which provides loans to underserved SMEs, and a secure payment platform which helps with the financial inclusion of users by allowing them to send, receive, and finance payments online.
Measuring performance
We focus on comparator indices with an emphasis on the medium to longer-term (three to seven years) than on any shorter period.
We have chosen the MSCI ACWI All Cap Index to be our principal comparator index. This covers approximately 99% of the global equity investment opportunity set and includes developing countries and smaller companies. It matches most closely our intention to invest wherever the best impact companies in the world can be found regardless of geographical location. We also we have chosen the Consumer Price Index plus three per cent per annum as a second comparator.
Foundation Scotland has a specialist Investment Committee with highly experienced former investment managers which meets quarterly to examine the performance and make up of the Portfolio. Once a year we have a formal meeting with EQ however we engage informally with EQ frequently.
In terms of safeguards, all cash transactions to and from the fund are triply authorised and cash can only be returned to the main Foundation Scotland bank account. In addition, all our funds are audited as part of our annual audit. The Foundation is Cyber Essentials and UKCF accredited.
Associated risks
The risks for an impact fund are the same as with any mainstream stock market investments, although research suggests that companies focusing on positive impact mitigate some of these.
The all-equity fund nature of the Foundation Scotland Impact Fund Portfolio is likely to result in significant short-term fluctuations in its value. Therefore, holders must take a long-term view of performance.