Features

The growth, drivers and choice behind ethical investment

Published

12 years ago

April 18, 2013

Contributor

Mark Robertson recently left his post as head of communications at responsible investment research firm EIRIS. Here, in a valedictory article that originally appeared in The Guide to Ethical Funds 2013, he looks back on the rise in prominence of sustainable investment.

2013 marks 30 years since EIRIS was established as the UK’s first independent research organisation for green and ethical investment. From niche to mainstream, from UK to global, from individual interest to institutional interest, EIRIS has evolved with the green and ethical investment industry and has been at the centre to push it forward over the last three decades.

Given the credit crunch and financial crisis, plus unethical behaviour at scandal-hit banks, it’s not surprising that growing numbers of consumers across Europe and elsewhere are looking for financial products that offer a more ethical, sustainable and long-term approach to finance.

Growth

Latest statistics from EIRIS show that there’s currently around £11 billion invested in over 100 green and ethical funds. That’s up from £4 billion 10 years ago. Last year, UK ethical banks such as the Co-operative and Triodos attracted more than 100,000 new customers at a time when many high street banks were hit by a series of scandals including Libor fixing at Barclays, UBS and the Royal Bank of Scotland, and HSBC and Standard Chartered falling foul of American regulators.

Against a backdrop of rising energy prices, a growing population and increased competition for dwindling natural resources, climate change, human rights and increased focus on supply chain ethics, sustainability issues have never been more relevant to investors

Meanwhile, statistics from the Global Sustainable Investment Alliance 2012 Review found that some $13.6 trillion (£8.6 trillion) was invested sustainably or responsibly worldwide.

Drivers

So what’s behind the growth in green and ethical investment and which factors are likely to increase demand?

Sustainability megatrends continue to make the case for long-term, sustainable investment. There is a growing need to ‘do more with less’ in the context of population growth, climate change and resource availability, particularly with regards to pollution, and the consumption of energy and water resources.

Those investors that reduce risk and maximise investment opportunities by seeking out companies which have the best performance on environmental, social and governance (ESG) issues, or by engaging with companies to improve performance, will be best placed to manage the global challenges that are coming our way.

At the same time, growing consumer interest in green and ethical issues such as climate change, animal welfare, fair trade, human rights and the environment is encouraging more consumers to consider green and ethical financial products.

Corporate scandals and high-profile failings at big companies continue to shine a spotlight on sustainable investment. You only have to look at failures at BP, News Corporation, Vedanta and Olympus to see the importance of understanding and improving corporate performance on ESG issues.

There’s now greater accountability and more focus on the extent to which investee companies are compliant with global norms and conventions such as the UN Global Compact and the UN Environment Programme Finance Initiative.

Investors are becoming more active shareholders by engaging with companies to improve their sustainability performance and integrating ESG issues into voting decisions, especially on key issues such as executive pay.

An increasing number of stock exchanges around the world have also implemented initiatives aimed at driving improvements in corporate disclosure and performance on ESG issues. In 2001 EIRIS began working with FTSE on the development of its FTSE4Good Indices which are only open to those companies that meet globally recognised corporate responsibility standards.

Choice

Mainstreaming green and ethical investment is about ensuring a good range of green and ethical financial products are available to all consumers across all aspects of ethical finance.

The issues which many ethical funds seek to address through their investment policies are still as live and important to investors as they were 30 years ago. Guns and weapons still kill people; huge health risks still exist around alcohol and tobacco; and pornography and gambling are still highly controversial business activities to some.

Corporate scandals and high-profile failings at big companies continue to shine a spotlight on sustainable investment

Against a backdrop of rising energy prices, a growing population and increased competition for dwindling natural resources, climate change, human rights and increased focus on supply chain ethics, sustainability issues have never been more relevant to investors.

Ethical and responsible investment strategies are therefore moving beyond simple negative screens to also take into account the material risks and investment opportunities which these challenges pose.

Opinions and views vary so it’s vital that different green and ethical funds exist to enable people to invest in line with their own beliefs or concerns. The good news is that with over 100 green and ethical funds available, there’s now more choice to investors than ever before.

However, it’s also vital that retail fund managers embed material, sustainable investment principles across all funds under management, not just in the green and ethical funds they offer.

In the same way that cafés are moving from offering Fairtrade coffee as an optional extra to ensuring that all the coffee they serve is Fairtrade, financial institutions need to stop thinking of sustainability as an ‘add-on’ and instead integrate it into all of the investments they make.

Green and ethical funds have acted as a catalyst for this by demonstrating the benefits of integrating ESG issues into financial decisions to reduce risks and maximise returns.

Looking back over last three decades, there is a lot we can all be proud of, but equally there’s still a lot left to do. We need an even greater range of financial products that enable investors to invest in line with their ethics and to provide access to the many exciting new types of sustainable investment themes and opportunities which exist.

For green and ethical investment to be really effective, we also need mainstream fund managers to report back to their customers on how they are adopting longer-term sustainable investment principles across all their investments.

Around the world, millions of investors across the world continue to support ethical investment by investing in funds which have driven improvements in corporate behaviour and acted as a catalyst for positive change in financial institutions by championing the advantages of long-term, sustainable investment.

Looking ahead, there is scope for ethical and responsible investment to achieve so much more. I hope financial institutions rise to this challenge by making ESG issues a key part of the investment. Give the sustainability challenges which we all face, we can’t afford for them not to do so.

Mark Roberton is ex-head of communications at EIRIS.