Every one of us invests money to increase his/her own capital however not everyone wants to achieve their objective in the same manner.
A front which has been growing over the years is that of sustainable and socially responsible or ethical investing. In the US alone, more than $8.7 trillion dollars are currently being professionally managed in these kinds of strategies. This comes to no surprise with the topics like climate change, gender equality and sustainable development always on the global agenda.
Sustainable, responsible and impact investing (SRI) is an investment approach that considers environmental, social and corporate governance (ESG) criteria to generate long-term returns and positive social impact.
SRI or ethical investing first and foremost depends on one’s personal beliefs and each individual investor has different ideas about what is ethical or not in a company.
Broadly speaking, however, ethical investing or SRI is a way of generating returns in the markets by supporting companies that are creating positive change in the world.
The adjacent pie chart provides some examples of ESG criteria considered.
What are the approaches involved in SRI?
1) Negative Screening
By using this strategy, an investor would be avoiding exposure in companies which operate in controversial sectors such as fossil fuels, tobacco, arms manufacturing, animal testing, pornography, alcohol and others.
Some examples would be by not including companies which have been convicted of a pollution offence in the last five years, companies which produce ozone-depleting chemicals or companies involved in intensive fish farming or genetically modified foods.
2) Positive Screening
The alternative to negative screening whereby the investor focuses on what the company does in a positive way such as the use of renewable energy, helping to look after the employee’s health, adopting sustainable principles, gender equality or having a good employment policy.
This is an approach whereby shareholders are active in the sense that they join forces and enter into dialogue with firms to try an encourage behavioural changes. Engagement does not actively screen companies it instead looks to have a positive impact by incentivizing companies to adhere to better standards such as implementing environmentally conscious measures.
4) Social Impact Strategy
This is a relatively recent development in ethical investment and has the main focus on the contribution the clients’ money will have on society. It might be considered as a middle of the road approach between traditional investment and philanthropy.
An example would be investing in a fund that offers loans in the form of microfinance to people who would otherwise have no access due to the high-risk nature of their country or lack of collateral. Another example would be investing in a crop company that aims to expand in renewable energy or sustainable agriculture.
5) Thematic Investing
The investor will look across sectors and geographic regions to invest in businesses that fit under a common theme such as ‘industries of the future’ or ‘climate change’
6) Corporate Governance
In this case, the main concept to look at is that businesses are being responsible corporate employers. This would include areas such as the quality of environment reporting, employee relations and executive remuneration policies. There are widely established metrics available in this area and detailed analysis and monitoring is undertaken to identify companies with potential reputational risk. Essentially, the theory being that a well-run company will be less at risk of being the next Volkswagen (following the emission scandal in 2015) or BP (following the oil spill disaster in 2010).
Is there really any demand for this type of investing?
According to the Wall Street Journal, after the U.S. withdrew from the Paris climate accord, investors moved more money into sustainable funds. Large inflows were also recorded when President Trump took office in 2016 and after the Parkland school shooting. As we can see from the chart below, the %inflows in sustainable mutual funds increase drastically in times when investors felt that there is going to be a major political shift which might affect their social/environmental principles.
Will performance suffer?
One of the myths of sustainable investing is that in order to avoid a tobacco company or focus on environmental champions, the investor will end up with a drag on his performance for the sake of his/her own values.
In reality this is not true. If we take the MSCI World SRI Index for instance, which includes stocks across developed markets that adopt ESG standards we notice that over the majority of the periods, the index has generated similar returns and sometimes has even outperformed the standard MSCI World Index.
Since September 2007, the MSCI World SRI index generated an annualized return of 5.90% vs 5.41% (in USD terms) generated by the MSCI World. Not too bad for being the underdog! (Refer to the below chart for more detailed returns).
Can I invest in sustainable strategies?
The answer is of course yes. One can either screen individual companies or else invest in mutual funds or exchange traded funds who will manage money using ESG criteria and following one or more of the approaches mentioned above.
A well-known fund house in the ESG space is Steward Investors which manages the Steward Investors WorldWide Sustainability Fund. The funds invest in global shares which have environmental, social and ethical issues at their heart. The fund was launched back in 2013 and has since generated a healthy return of 71% (i.e. 14% per annum).
Do you want to know more about SRI investing and maybe would like to invest in a particular strategy?
Send us a message on our contact us page or an e-mail on firstname.lastname@example.org and our advisors will be in contact to discuss the available options that will suit your needs.
Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice. No person should act upon any opinion and/or information in this document without first obtaining professional advice.