Making a Difference Through Ethical Investments
Recently, a client asked if the trend across global markets towards ESG investments was a fad, or whether there was any long-term place for such investments in his balanced portfolio.
Less than 10 years ago, another client of mine laughed at the idea of including a renewable energy fund instead of a natural resources fund. This was when oil was over $100 a barrel and the past performance of renewable energy was unimpressive and limited. There is no doubt that the conventional energy sector offers incredible value as it still represents roughly 85% of global energy demand. It has particularly suffered during the pandemic as transportation demand has decreased, among other factors, while sustainable energy has soared.
Aside from government policies encouraging the sector to grow, naturally driving profitability, there is also growing demand from investors themselves wanting to align their investments with their own ethical views.
There is still room for growth in the renewable energy sector in the long-term, but an interesting development in the increasing number of ESG funds now available is that underlying company holdings tend to be spread across multiple sectors, creating quite a diverse fund in its own right. Many of the world’s largest industry leaders, such as Apple, Pepsico, L’Oreal, are included in these funds – so one may beg to differ: Why and what exactly are they doing to be considered ethical?
Although investing sustainably is a compelling story, the interpretation of what is considered ethical is rather dubious and subjective. So, what actually is the criteria for a stock or fund to be considered ethical?
One question I always ask my clients during our meetings is: From an ethical point of view, is there anything you wish not to invest in?
Quite often, clients may request not to include any arms companies, as the negative impacts these companies have in the world are well-understood. Very rarely would clients want to exclude anything related to fossil fuels though. After all, it wasn’t seen that there was any other viable option to fulfill global demand until recently.
It wasn’t even 10 years ago that some clients would say, “No, I want my investments to actually make money”. At the time it was accepted that companies such as BAE systems for example – a British arms manufacturer – maintained steady long term performance with high-dividend yields, and was a safe inclusion in many funds and investment portfolios. The same applied to dividend yields from many conventional energy companies and the increasing price of oil.
There was also less focus on general business practises in many other sectors and the impact their business models had on the modern world.
Nowadays, this is not the case. Investors are deciding that there are many more companies around the world,and wish to look closer at the businesses they do invest in. Many companies have now started to change the way they operate — mainly due to the fact that government policies have started to change and governing bodies who analyse ethical business practises have grown.
The choice of ethical fund options have also dramatically grown, especially in the past 2 years — to the extent that there are now subcategories that allow you to zoom in on what is included in these funds and why.
2 categories that I use to help my clients identify what to include in their portfolio depending on their requirements are: SRI (socially responsible investments) and ESG (environmental, social and governance).
Why invest in ESG Funds?
If you’re seeking a truly ethical way to invest, then ESG (Environmental, Social, and Governance) investments could be exactly what you’re looking for.
ESG investing is significantly different from other ‘ethical’ investments, such as Socially Responsible Investing (SRI) in that investors consider environmental, social, and governance risks and opportunities that can impact company performance, whereas SRI focuses on financial returns in light of impact on sustainability efforts. ESG often includes no arms, tobacco, oil, or gas.
With ESG investing, the asset selection process incorporates additional analysis techniques that relate to ‘environmental’, ‘social’ and ‘governance’ factors. This means that you get to choose assets based on how ‘ethical’ they actually are, and, by doing so, can proactively contribute to positive social and global change, going beyond environmental impact.
ESG investing is on the rise. More than half of all financial advisers asked said there had been a significant uptake in ESG queries from clients, with most of those coming from younger investors.
A new way to invest responsibly
Socially responsible investing is not a new concept. For years, asset managers have sought out ethical and green investments based on instructions from their clients. However, in recent years, the trend is growing and many businesses are incorporating CSR (Corporate Social Responsibility) policies, becoming involved with ethical projects such as clean energy, and actively looking at what they can do with their business model in order to make their businesses more attractive to investors.
Whether it’s a climate change initiative, human rights issue, or simply to promote equality, more organizations are realizing that investors want to invest ethically, and as a result are changing their culture, the way they operate and the projects they endorse.
The ESG criteria used to assess a company can vary greatly, but can be broken down into its three main tenets:
Environmental
How does a company source and use energy, and what they do in terms of waste, pollution and their impact on the environment?
Social
Who are the company’s business partners? How does the firm treat its employees and stakeholders? How well does the company fare in terms of diversity in its employment, its adherence to labor laws and regulations, and how does the business affect the community?
Governance
This criterion examines how the company operates in terms of transparency and accountability. For instance, are there any conflicts of interest on the board?
Investor Capital makes the world go round
In the past, these investments came with a downside in terms of profitability, but this is no longer the case. ESG analysis is now being viewed as a tool to mitigate risk. A good example of this would be BP’s oil spill of 2010, which resulted in significant losses for investors.
ESG principles and how they monitor corporate behavior, along with growth in ESG investments has given investors more clarity when it comes to the decision-making and boosted the appeal of ESG funds. And this popularity, in turn, has improved ESG fund performance. ESG funds are becoming more resilient and performance is improving.
Likewise, as investors seek to invest in more ethical firms, companies are actively integrating ESG criteria into the way they operate. As businesses begin to see the added benefits of being more ESG-aware, they become more appealing to consumers and investors and enjoy sustainable growth.
Investors no longer have to sacrifice performance in order to invest in funds that are doing the right thing. Now you can invest ethically and still make a profit. In fact, even if you’re not particularly interested in ESG investing, it might be worth your time to review your existing portfolio to see where you could be doing better by looking at certain ESG investments, or consider ESG funds if you’re looking to start investing.
All the modern sustainability, climate change, and socioeconomic issues we face are our responsibility, as much as it is of government institutions and policies. We can do our part to drive businesses to seek growth in innovative ways from their long-standing methods.
- If you are living abroad and want to learn more about how to build an international sustainable investment portfolio, GET IN TOUCH to find out more about what’s available from top fund managers such as Guinness, Black Rock, Vanguard and Fundsmith.
- There are many tax efficient accounts to hold these sustainable investment solutions depending on your circumstances. It’s important to receive unbiased, impartial advice from an adviser who is able to tailor solutions to your goals, needs, and values.
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