10th October 2017 at 3:19pm
Irresponsible corporate behaviour can have devastating effects on individuals, society and the environment. Most people remember the impact 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 here (8-14 October), we ask Amanda Young, Head of Responsible Investment at Standard Life Investments, such questions and more.
Is demand for ethical-type 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 here in the UK, the size of the ethical and green funds market was estimated to be greater than £15 billion2 in 2016.
In fact, the appetite for all things ethical continues to grow. Beyond financial products, The Ethical Consumer Markets Report estimates 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 driven this growth?
It’s been fuelled by changes in society and an increasing awareness that the companies we invest in have a direct impact on the environment and society. This is particularly true of the millennials. This generation has 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 interest in 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 are twice as likely as other investors to invest in companies or funds that target specific social or environmental outcomes.
There’s a growing awareness that the companies we invest in have a direct impact on the environment and society
Even in investments without a specific ethical focus, investors are keen to understand the environmental or societal impacts of how their money is invested. According to the 2016 Global Sustainable Investment Review5, a quarter of the world’s assets incorporate environmental, social and governance (ESG) measures as part of their strategies.
This means that fund managers take account of the relevant environmental and social issues of their investments, such as human rights risks in supply chains for clothing retailers, or the environmental impact of a mine. The fund managers need to know how these companies are managing the risks associated with their operations beyond the financial ones, as well as making sure their investments have not 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.
Can we really match our investments to our values?
Nowadays there’s a huge range of options for customers who wish to match their investments to their values. These range from traditional ethical funds, which exclude ‘sin sector’ stocks such as alcohol, tobacco and arms companies, through to faith-based options and sustainability-themed funds that address issues like climate change.
And we continue to see investors asking for a variety of 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 screening (avoiding certain investments), to more advanced 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.
Many investors now seeks investment in companies or organisations that aim to achieve a measurable positive environmental or social outcome
What’s the most exciting development you’re seeing in the ethical sector?
For me, it’s the rise in different types of products that are available. 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 newly-established investment firms 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 has 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. For instance, the Standard Life Investments UK Ethical Fund has been running for nearly 20 years and has significantly outperformed its benchmark over that period – delivering 237% versus the FTSE® All Share return of 177%*. The fund has achieved this while excluding a significant number of stocks involved in sectors deemed unethical such as tobacco, gambling and armaments.
*Standard Life Investments UK Ethical Retail Fund in GB compared to the FTSE® All Share index total return, bid-bid basis, in GB: from launch 11 March 1998 to 30 June 2017, source: Financial Express
Growth of the Standard Life Investments UK Ethical Fund over individual 12 month periods up to 30 June 2017.
|Year to 30 June 2013||Year to 30 June 2014||Year to 30 June 2015||Year to 30 June 2016||Year to 30 June 2017|
|Standard Life Investments UK Ethical Fund||32.7%||11.3%||13.1%||-11.2%||32.1%|
|FTSE® All Share Index||17.9%||13.1%||2.6%||2.2%||18.1%|
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.
It’s worth bearing in mind though that 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.
Nonetheless, 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.
If companies take into account all the risks and impacts of their operations…their businesses tend to be better-managed which leads to out-performance over the longer term
What’s your one piece of advice to an ethical investor?
Make sure you understand the details of an ethical investment policy. Just because a fund says it’s ethical, doesn’t always mean it is. For instance, our own assessment shows that, at the moment, a large number of funds in the UK market place don’t publish their ethical policy on their websites. Public transparency around how ethics are attached to funds is very limited.
Always aim to understand the policy, how it’s implemented and overseen, and how the fund intends to report its performance against the ethical policy. And remember, ethical policies can vary, so make sure they actually match your goals or values.
Remember, ethical policies can vary, so make sure they actually match your goals or values.
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 (an umbrella term used to describe the varied ethical and socially responsible investment types) in the investment world. We’re delighted to be a sponsor of such an important event.
Interested in matching your investments to your values?
The ethical sector has moved on a lot in recent years – you now have lots of choice if you want to align your investments to your values. You can find out more on the ethical investing page and if you’re interested in the values-based investment funds Standard Life offers you can download the values-based fund guide.
Please remember that the value of your investment can go up or down, and may be worth less than you paid in. Past performance is not a guide to the future.
The links provided in this blog are for general information purposes only. Standard Life accepts no responsibility for information contained in the sites or for the sites not being available at all times.
The information in this blog or any response to comments should not be regarded as financial advice, October 2017.
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)
52016 Global Sustainable Investment Review (PDF)