Irresponsible corporate behaviour can have devastating effects on individuals, society and the environment. Most people remember the devastation of the BP Deepwater Horizon oil spill. So, it’s no wonder that more of us are looking for ways to invest in socially-responsible companies that seek to have a positive impact on our lives and communities.
But is it really possible to invest in a way that aims to both make a difference and to make a return?
With Good Money Week now underway, I thought it was a good time to ask Amanda Young, Head of Responsible Investment at Standard Life Investments, such questions and more.
Is demand for ethical and socially responsible investments increasing?
Yes it continues to increase. The European responsible investing fund market has almost doubled since 2010 to €476 billion of assets under management at the end of 2016¹. And the size of the ethical and green funds market in UK was estimated to be greater than £15 billion² in 2016. It’s clear consumer appetite for ethical things is continuing to grow.
Beyond financial products, The Ethical Consumer Markets Report estimates the value of all ethical spending in the UK to have grown to £38 billion in 2015. This makes the ethical goods and services sector worth almost double the tobacco market in the UK³.
What’s fuelled this growth?
Changes in society and a growing awareness that the companies we invest in have a direct impact on the environment and society are the main factors.
This is particularly true of the millennials. This generation have grown up in the shadow of 9/11, have first-hand experience of the rise of access to information through the internet, and have a growing awareness of society’s challenges such as climate change or inequalities. For many millennials, profit isn’t the sole goal. In fact a 2015 survey4 highlights that millennials were twice as likely as other investors to invest in companies or funds that target specific social or environmental outcomes.
Even in mainstream investments, investors are increasingly integrating environmental, social and governance (ESG) into research and analysis of their investments. According to the 2016 Global Sustainable Investment Review5, a quarter of the world’s assets incorporate ESG as part of their strategies.
At Standard Life Investments, we employ a dedicated approach to environmental, social and governance (ESG) investing. This means we take account of the relevant environmental and social issues for the companies we invest in, such as human rights risks in supply chains for clothing retailers, or the environmental impact of a mine. We look at how companies are managing the risks associated with their operations beyond the financial ones, as well as assessing whether they have had a negative impact on the environment or society around them.
In addition, it’s really important to understand the governance structures of companies to ensure that companies are managed in the best interests of shareholders. This includes looking at board composition, how directors are paid, the audit process and conflicts of interest.
What’s the most exciting development in the ethical sector?
For me, it’s the rise in different types of products that are produced. I love how the capital markets can be used in a positive way for the environment and society. Using the power of the capital markets to direct capital for a social good has the ability to drive significant positive change.
I find the rise in social impact investing particularly exciting. It’s encouraging to see investment firms being established that are actively seeking positive social outcomes from their investments. Social impact investments aim to invest in social enterprises that have been set up to run in a commercial way – for example, Big Issue Invest, the investment arm of the Big Issue. Big Issue Invest has embraced impact investing by financing sustainable social enterprises and charities that make a positive difference to people and communities across the UK.
Do you sacrifice the potential for returns if you invest ethically?
This is a myth that’s been around for a very long time. It’s absolutely not the case.
As with all investments, it’s important to look at a fund’s performance over the longer term and understand the strategy its investment manager adopts. Yes, any fund that excludes large elements of the market place may have performance challenges if those areas of the market outperform over a given period. Such funds may be more volatile over shorter periods.
Many investors believe that investing in companies that meet sustainability criteria should actually help improve the potential for outperformance. After all, if companies take into account all the risks and impacts of their operations – including human rights, environmental issues and how they manage their employees – their businesses tend to be better-managed. In turn, this can help lead to outperformance over the longer term.
Past performance is not a guide to the future. As with any investment, the value can go down as well as up. An investor may not get back what they invested.
Can we really match our investments to our values?
Nowadays there’s a huge range of options for investors who wish to match their investments to their values. These range from traditional ethical funds, excluding sin sector, through to faith-based options and sustainability-themed funds that address issues such as climate change. And we continue to see investors asking for a variety of different options that reflect their own changing attitudes and those of society.
Investors have become more sophisticated in their demands, with many moving away from pure negative screens (avoiding certain investments), to more products that include positive selection criteria. Impact investing is the latest of these, where investments are made in companies or organisations that aim to achieve a measurable positive environmental or social outcome.
Why does Good Money Week matter?
The Good Money Week campaign helps grow and raise awareness of sustainable, responsible and ethical finance. It helps educate consumers and advisers that everyone has sustainable and ethical options for their money. It also allows all those involved in the ‘good money’ sector to focus their efforts on promoting all things values-based in the investment world. At Standard Life Investments, we’re delighted to be a sponsor of such an important event.
Financial planning can incorporate your values
The ethical sector has moved on a lot in recent years – you now have plenty of choice if you want to align your investments to your values.
It’s important to understand the ethical policy of a fund, how it’s implemented and overseen, and how the fund intends to report its performance against the ethical policy. You may want your financial planner to help you do this as there are varying degrees of ethical policies and many funds don’t publish these – which can make it difficult to see how ethics are attached to the fund. Your financial planner can find out what’s important to you and make sure you’re invested in a fund that best reflects your values.
If you have any questions about your investment strategy, your 1825 Financial Planner will be happy to help.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go up or down, and may be worth less than you paid in.
1KPMG April 2017, European responsible investing fund market 2016 statistics
2Vigeo Eiris 2016 UK & Europe Retail Funds Estimate
4Morgan Stanley Institute for Sustainable Investing – Sustainable Signals: The Individual Investors Perspective February 2015 (PDF)
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