Not so long ago investing in this way was seen as a sometimes thankless compromise; investing with a moral conscience meant lack of choice and poor performance. The approach would often involve avoiding certain areas, alcohol or tobacco, whereas now the focus is much more on making positive decisions on what you do want to invest in. There is a great deal of choice and no shortage of really good options that have very strong track records. For example, Royal London Sustainable World is in the top quartile of equity funds and has 5 year annualised returns of over 13%. A study by investment bank, Morgan Stanley, concluded that investing in sustainability usually met and often exceeded the performance of more traditional investments.
One of the challenges has always been that no two people agree on exactly what counts as an ethical fund. Whilst many subsets exist the main determinants are now seen as:
- Environment: what impact does the company have on this
- Social: how does the company interact with the community it serves and/or treat its employees
- Governance: company standards, executive pay
The effect of getting these things wrong can be seen, in the recent past, with British Petroleum and Volkswagen to the tune of many millions of pounds in fines, let alone lost revenue.
In the last survey of sustainable investing, this market in the UK grew by over 25% to well over £100bn. It is also very relevant to know that, even with this strongly upward trend, we are way behind similar growth in the US, Japan and Australia.
There is a saying to let the trend be your friend and for investing this has often been very apt. If we also look at changing demographics with increasing wealth via inheritance coming to millennials this is likely to create a further boost. At present those aged 18-40 represent 40% of the total eligible investors but they hold over 50% of ‘positive investments’.
In the recent past responsible investing has often been associated with renewable energy and similar schemes though now there are so many more interesting options. For example two funds come to mind; one of which tracks gender diversity within the workforce and another that monitors how employees are treated. These ideas make a lot of sense as we all know the power that a very motivated, diverse and loyal workforce has on a company. In addition to this, more generalist funds exist covering all types of asset and geographic region so it is possible to build a fully diverse portfolio with lots of choice.
In summary, even if one could argue that ESG investing is not yet fully ‘mainstream’ it will be very soon and in a rapidly changing world, any investor ignores this at potential peril to their wealth. At Blue Sky, as an independent adviser, we offer a full suite of options for those clients who see this as an area of interest.