Prosper Social Finance: Students Taking Responsibility Through Socially Responsible Investing
14th February 2020
Our society revolves around a financial system that many of even our most educated citizens do not understand. This same financial system continues to support many of the most ruinous activities and practices that companies perpetrate on our society and our planet. Many successful student campaigns have been run in the cause of divestment, getting their universities to move their funds away from the most damaging industries. We now have the opportunity to channel this money towards better ends and as students we have a responsibility to take control of our futures.
Prosper Social Finance is the UK’s first student run socially responsible investment fund. Founded in 2018 by a group of students at the University of Edinburgh, it exists to tackle exactly these issues. The training programme we run is open to all students at the university with an emphasis on recruiting from non-financial academic backgrounds. The course covers the fundamentals of investing and then details our approach to analysing what actually makes companies sustainable. During the training, our students find, research and analyse companies that excite them and align with our investment values. This culminates in an investment report and pitch to a panel of experts. The best of these companies are then invested in our fund.
The university has provided Prosper with an endowment of £50,000, invested in £5,000 instalments following the conclusion of each training programme. We invest for 5 years, encouraging our students to think about investing in the long term, a philosophy we believe is sorely lacking in the rest of the financial world. After the 5-year period, we sell the stocks and reinvest the base £5,000 plus inflation. Any profit we have made we distribute to social enterprises and charitable initiatives in the Edinburgh community. This is a sustainable model, as assuming no major losses, we shall need no further funding. This shows how money can be used in virtuous cycles to benefit society.
Our investment philosophy is founded on the belief that a concentrated fund of high quality, sustainable stocks will outperform the rest of the market. Good corporate behaviour will protect our investments from scandal and their business models, by the very nature of the word sustainable, will be aligned with our longer-term investment horizon. Alongside this we see a moral imperative to channel money away from those who are causing the environment and society harm towards those helping build a better future. As such, our analysis process is values based and bottom up. We do not do any negative screening, instead preferring to start from a position of analysing what qualities we would like to see in the companies we invest in.
After values, we assess the environmental, social and governance (ESG) qualities of the companies in detail. We have built our own ESG matrix, breaking down the broad themes of E, S and G into more granular elements. This provides a consistent approach whilst still allowing our analysts to dig deep into the complexities of what it means to be a sustainable company. Many green funds available on the market are based on simplistic metrics that fail to capture this complexity; we train our analysts to look past simplistic but catchy numbers about carbon emissions reductions presented in flashy sustainability reports.
Only once we are satisfied with the high standard of the company’s ESG behaviour do we begin to assess financial situation and relevant macroeconomic factors. An attitude to sustainability is often reflected in a company’s financial behaviours, their approach to manageable growth and appetite for taking on debt for example. Many of the factors we look for in our ESG analysis also benefit the growth story of the companies we invest in. Innovative techniques for resource use reduction or growing demand for renewable energy sources drive the growth that we as investors can then share in. We look for companies that use sustainable practices to drive their business growth, rather than supplement it.
All of this provides a fantastic basis for education, advocacy and discussion. The course exposes our students to the intricacies and grey areas surrounding the sustainability debate. Should you support Unilever, who despite using 8% of the world’s palm oil have the expertise, reach and world leading governance structures to tackle the issues they themselves create? Do companies that improve industrial efficiencies help reduce resource use or boost harmful consumption as more can now be produced for less?
Through exposing the students to our financial system we also encourage critical discussion of how the system is currently constructed; the inherent flaws and inconsistencies become apparent when taught to those encountering them for the first time. It also exposes how incompatible an economic system built on growth can be with regard to resource consumption and planetary boundaries. Perhaps by working within this system, we ourselves are not being radical enough.
Prosper is still in its infancy, but already we have trained over 80 students. We do not expect them all to go on to become fund managers or even necessarily into the financial industry. Rather we hope we have provided them with a fundamental financial literacy and the critical thinking skills necessary to effect change however they chose to do so. Though our direct financial impact is minimal, we aim to prove that our model can provide financial gains alongside social benefit. Moreover, we hope to inspire the next generation of leaders to go out and effect the change we as a society so desperately need.
Executive Director of Prosper Social Finance and student of Physics and Music at the University of Edinburgh.