Skip to main content

Markets and investments

Investment Insights from 1825 – Let’s get ethical

Lee Moran | May 08, 2019

Time to read: 5 minutes

Lee Moran,

The information in this blog or any response to comments should not be regarded as financial advice. If you’re unsure of any of the terminology used you should seek financial advice. Remember, the value of investments can go down as well as up, and could be worth less than what was paid in. Past performance is not a reliable guide to future performance. The information is based on our understanding in May 2019.

 

A £48 billion market by 2027?

Ethical Investing is one of the fastest growing trends with UK investors. And, undoubtedly helping boost its popularity is performance, which suggests healthy investment returns and an ethical or socially responsible approach to investing needn’t be mutually exclusive.

Dutch-based sustainable bank, Triodos Bank, has carried out a great deal of research into this market. In its latest Annual Impact Investing survey, it expects the UK ethical investment market to reach £48 billion by 2027, up from a figure of £15 billion back in 2016. The report states  that ‘a fifth of UK investors are planning to invest in a socially responsible investment (SRI) fund in the coming years, rising to 47% amongst younger investors aged 18-34.’ As this demographic begins to mature, we’ll begin to see a more even spread across age groups.

Historically, the ethical sector had been (wrongly) thought of as providing poorer investment returns compared to their unconstrained counterparts.  The table below shows the performance of the FTSE4Good Indices against the FTSE All-Share and S&P500 over 5 and 10 years, as well as individual 12 month periods over the last 5 years.

Index Year to
31/3/2015
Year to
31/3/2016
Year to
31/3/2017
Year to
31/3/2018
Year to
31/3/2019
5 Years to 31/3/2019 10 Years to 31/3/2019
FTSE4Good UK1 6.96% -5.24% 21.58% 1.52% 8.18% 35.44% 185.85%
FTSE All-Share Index1 5.72% -4.36% 22.52% 1.25% 6.36% 33.39% 184.01%
FTSE4Good US1 29.99% 5.74% 33.60% 2.13% 19.43% 128.15% 413.55%
S&P500 Index 24.67% 4.64% 31.28% 1.01% 17.17% 106.25% 346.59%

Source: Financial Express. Performance has been calculated on a total return basis, net of charges. All returns are expressed in GBP terms. Past performance is not a reliable guide to future performance.

 

As with all investments, the value can fall as well as rise and you could get back less than you invested.

As the Ethical sector has matured, so has the number of options. Variants of investment approach have increased in order to meet the wide ranging needs of investors.  Given the different terms used for each method of investing, it can lead to confusion, with terms being used interchangeably. To help provide an understanding for 1825 clients, below is a list of the main categories with a brief description on each.

 

Ethical Investment

Ethical investing is possibly the most well-established of all these investing styles. Originally it was the reserve for large trusts and charities that added restrictions to their investment mandates in order to ‘negatively’ screen out sectors that were contrary to their beliefs. This would typically include armament, fossil fuel and tobacco firms.

Over the years the industries excluded has broadened out to areas such as animal testing and human rights issues. There has also been the development of ‘positive’ screening which will actively seek out companies/investments that are helping the environment or society. Given the flexibility of ethical investing, mandates can be made as restrictive as the investor wishes. However, the more industries that are excluded, the narrower the investment universe becomes, which reduces the ability to provide diversification. For some investors, it’s more important that their money is invested fully, as per their views, rather than having a completely balanced portfolio.

 

Socially Responsible Investing (SRI)

SRI is deemed to be a broader, less personalised approach to ethical investing. The investment management teams will screen using social, environmental and ethical issues but only take this to a certain depth. For example, it’s likely that these managers will still exclude fossil fuels or tobacco but other industries may still have a small exposure. Therefore SRI funds may not be suitable for investors who have clearly defined views on what should be screened out for investment.

SRI funds differentiate themselves by having an emphasis on ‘sustainability’ and engagement. These could range from firms that are investing in clean energy, driving equality or having a social impact. The dual mandates for SRI funds can make them a good option for investors who have no defined ethical views but want their money managed in a sustainable way.

 

Environmental Social Governance (ESG) Investing

Although embedded within Aberdeen Standard Investments (ASI) for a long time, ESG investing is still relatively new to the rest of the investment industry. Investment analysts will review companies based on their environmental, social and (corporate) governance practices which will lead to an overall score. There is a trend that companies that have a strong ESG score perform better over the long term.

ESG is the broadest of all investment methodologies within the ‘ethical’ sector as its investment universe is wider. ESG portfolios can include fossil fuel firms if they have good corporate governance and are looking to develop clean energy technology. Investment Managers will also invest in companies where they believe they can help change corporate behaviour, for example, use of voting rights as shareholders to exert influence on a board.

 

Impact Investing

The latest ‘ethical option’ on our list, impact investing, looks to provide investment to generate better environmental and social outcomes that are tangible. This can range from well established companies looking to generate change, right through to local projects/investment funds that will target regional regeneration. Due to the characteristics of the firms within this investable universe, impact investing is deemed to be relatively more risky compared to other ethical practices.

 

Ethical Investing and Financial Planning

Evidence strongly suggests ethical investing, in any of the guises noted above, is only going to increase in the years ahead.  1825 has ensured that it’s able to incorporate all variants of ethical investing within our clients’ financial plan. It’s important to us that we not only meet our clients’ financial goals and objectives, but also meet their expectations on how they want their money invested.

If you’re interested in exploring ethical investing, please contact your 1825 Financial Planner who’ll be happy to discuss this in greater detail.

 

1FTSE International Limited (‘FTSE’) ©FTSE 2019. ‘FTSE®’ is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

 

Lee Moran

Lee is 1825's resident investment expert. Having held almost every position available in a financial planning business, he has spent the last 10 years focusing on investment management. In his articles, Lee will combine his expertise and e […]

Read Lee's blogs

Share

Any questions?

If you would like to discuss anything you've read here or want to know more about how financial planning could benefit you, please get in touch.

Share

Lee Moran

Lee is 1825's resident investment expert. Having held almost every position available in a financial planning business, he has spent the last 10 years focusing on investment management. In his articles, Lee will combine his expertise and e […]

Read Lee's blogs
Lee Moran,

Related articles

Market round-up: 13 – 17 May 2019

The latest this week from markets around the globe.

Arjun Pandya

May 17, 2019

Market round-up: 6 – 10 May 2019

The latest this week from markets around the globe.

Andrew Triggs

May 10, 2019

Browse more Markets and investments articles

Commentary and updates on world markets, investments and views from our experts.