The sustainable and ethical investment sector is growing. Where is this going and how should managers react?
Sustainable and ethical investment is on the march as consumers and investors begin to show an appetite for funds which do more than just make money. However, how strong is this so-called boom and can these funds really deliver?
Are we more ethical?
A poll for Good Money Week shows that more than 54% of people want their investments to have a positive impact beyond just making money. In 2016 70% of all investors contacted by Morgan Stanley said they were interested in sustainable investments. That figure jumped to 84% among millennials.
Indeed, a greater sense of social responsibility is driving enthusiasm for sustainability in all areas. Younger consumers are more likely to be concerned about the origin and sustainability of a product.
Money is flowing rapidly towards the sustainable investment sector. A report from US SIF (The US Sustainable Investments Forum) found that there were $8.72 trillion invested in funds classed as ethical or sustainable, a 33% increase on 2014. The number of shareholder proposals advocating ESG issues has also increased, suggesting shareholders are becoming more concerned about the social – as well as financial – performance of their assets.
For all this growth, though, there remains considerable misunderstanding about what the sector is and how these funds can perform. The term ethical or sustainable investment can be used to catch an extremely wide spectrum. Some will be funds which specifically target organisations driving positive social change.
Social impact investment
At the farthest end of the spectrum, this moves into social impact investment where the main purpose of an investment is social benefit rather than financial return. Investors might see a small or flat return enabling them to recycle their investments for other good causes.
A report for the Global Impact Investors Network projects the amount of capital invested to grow by 17% over 2016 and the number of deals to grow by 20%. Interest is coming from all investor types and investors appear increasingly happy to pursue social, as well as financial returns, and see the market as a useful bridge between market rate capitalisation and philanthropy.
Other funds simply invest in those businesses which avoid certain areas or those which can demonstrate a best in class approach to SRI. That can create confusion among investors who could potentially find themselves investing in sectors they would deem unsustainable as part of a sustainable investment package.
Performance of these funds is variable. Some experts believe the more sustainable nature of these funds represents a useful safe-haven from market volatility. They would be less prone to invest in toxic assets, for example.
However, the mere fact of additional selection on criteria other than financial performance does put these funds at a disadvantage from a purely financial point of view. The quality of performance often depends on the experience of the fund managers and the specific approach of the fund. Those which have in-house research teams rather than those which simply track the findings of the Ethical Research and Information Service (EIRIS), are better placed to take a more proactive approach to the market.
Choosing a fund can be a minefield for investors, both to achieve the financial return they are looking for and also to ensure the fund meets with their chosen values. Before making a decision it’s a good idea to find out about the investor team, the selection criteria and what this fund actually considers ‘ethical’.
The sector is making progress driven by an investor base which is gradually becoming interested in blended returns. However, understanding is still patchy about what constitutes ‘ethical’ or ‘sustainable’ and funds vary in their approach. That in turn creates a challenge. If funds are seen to be taking too light an approach to sustainability, or including stocks which many of their customers would view as unethical, the sector could lose the very thing it needs most: trust. There is potential, therefore, but as with many things, that growth requires careful nurturing.