This week is National Ethical Investment Week, which encourages investors to think about where they put their money and why.
Driven by the growing recognition of the need for companies to take a long-term approach to issues ranging from climate change to resource scarcity, the £12.2 billion market is performing strongly.
According to Moneyfacts, 'The average ethical fund has posted gains of 24 per cent over the last year, compared with 18 per cent growth from the average non-ethical fund. Ethical funds have also outperformed non-ethical funds over three years, with the average ethical fund up 36 per cent compared with 31 per cent for the average non-ethical fund.'
So why are more people seeking out sustainable investments and why are these funds performing well?
There are two key drivers for the growth in the market. The first is that people want to see their money doing good. Nearly two thirds of investors (63 per cent) would like to be offered sustainable and ethical options according to a YouGov survey for UKSIF, the UK Sustainable Investment and Finance Association.
The second reason is that savers increasingly recognise the market opportunity in building a more sustainable economy – and the dangers of failing to do so. Partly this is a reaction to the growing evidence that taking into account environmental, social and governance (ESG) issues, the drivers that underpin sustainable investment, makes good financial sense.
Events such as the Gulf of Mexico oil spill, which BP is still dealing with in court, the fatal fires at a textile factory in Bangladesh, the horsemeat scandal and the ongoing scandals in the banking sector are all stark illustrations of the serious impacts that failing to consider ESG factors can have on companies’ profits, their share prices and therefore investors’ returns.
In the past, there was a view that investors had to sacrifice returns in order to invest according to their beliefs – a reflection of the sector’s beginnings as ethical and faith-based investment that focused on excluding industries seen as immoral such as tobacco, weapons, alcohol, gambling and pornography.
There remains a healthy market for such funds, attracting churches, charities and public sector investors as well as private customers with specific ethical requirements. Good examples of funds of this type are Kames Ethical Equity or Kames Cautious Managed Fund. While investors in these funds are prepared to accept a certain loss of performance to satisfy their ethical requirements, it is worth noting that the Kames Ethical fund performed very well during the banking crisis precisely because the manager could not own bank shares on ethical grounds.
Selfish reasons to be good
On the whole, sustainable investment has moved beyond negative screening and for many investors looking at ESG issues is a matter of risk management – it is about value as much as values.
“More and more people are realising that sustainable and ethical investment is no longer just a moral issue. It is a hard-headed decision about the best way to manage your savings and plan for the future in a changing world,” says Simon Howard, chief executive of UKSIF.
There are a number of drivers for taking ESG factors into account when investing. At a macro level, it is clear where future investment will be needed, according to Seb Beloe, head of sustainability research at WHEB Asset Management – the world’s population is growing, becoming increasingly urban and getting older.
By 2030, the global population is set to be consuming 50 per cent more food globally, 50 per cent more energy and 40 per cent more water, Beloe says. On top of this, climate change will make it harder to produce this extra food, energy and water, as the recent report from the Intergovernmental Panel on Climate Change pointed out. 'A consequence of this escalating demand will be growing scarcity, upward pressure on commodity prices, greater price volatility and real constraints on resources in some areas. The demand for efficient solutions to these problems is all but assured.'
Companies that take these issues into account, or better still, provide solutions to them, will be well-placed to profit in future, while those that do not will be at a disadvantage.
A report by Deutsche Bank shows that companies that take ESG factors into account have a lower cost of capital and higher share prices than their peers, while recent research by the Carbon Tracker Initiative and London School of Economics suggests that investors in carbon-intensive businesses could see $6 trillion wasted in the next ten years as policies limiting global warming stop them exploiting their coal, oil and gas reserves, leaving them with 'stranded assets'.
'Businesses whose activities contribute to environmental and social problems face a range of risks which could see them lose value in the future, from government regulation to consumer boycotts,' says Howard. 'Businesses which recognise and address sustainability issues will be at far less risk of value loss. Individuals can go further and make a positive decision to invest in companies which are helping to solve these problems and innovating to create a more sustainable future.'
Accessing ethical investments
So how can investors tap into these trends? In addition to the funds available, values-driven investors can find investment opportunities that offer social and environmental benefits as well as a financial return on platforms such as Ethex. It offers the chance to invest in projects ranging from an organic farm to a community-owned school biomass project to an ethical landlord.
Socially Responsible Investment (SRI) funds emphasise a more profit-driven approach, using a 'best-in-class' approach to portfolio-building. For example Alliance Trust operates a range of funds that focus on financially strong companies at the forefront of sustainability or environmental themes. The core themes for these funds are: energy efficiency, environmental protection and pollution control, managing water resources efficiently and transportation, along with healthy lifestyles and combating obesity. Other funds dedicated to this field include Ecclesiastical, Pictet, Cheviot Climate Assets, Impax and WHEB Asset Management, while providers such as First State, Henderson Global Investors, Standard Life and F&C all offer SRI funds as part of their product portfolio.
A number of project developers, such as Greencoat UK, Foresight and Bluefield, have listed on the London Stock Exchange to raise money for renewable energy projects, while others such as Good Energy have launched bond issues. There are also opportunities for direct investment in renewable energy projects via crowdfunding organisations such as Trillion Fund and Abundance Generation.
It can be difficult to navigate the sustainable and ethical investment landscape but there are a number of specialist advisers that can help, such as Barchester Green, Gaeia, Holden & Partners and In2 Consulting.
Tanya Pein of In2 Consulting, co-chair of the Ethical Investment Association, the sector’s trade body says: 'I offer all my clients the opportunity to invest in sustainable and ethical funds as part of their portfolio. I do this because the performance of a number of those funds is outstanding. The idea that investing ethically always means sacrificing performance is a myth. Clients can enjoy a very positive return by putting their money into sustainable and positive investments in line with their values.'