In 2008, financial adviser Filip Slipaczek made the headlines. Ethical investment, he said, “is no longer within the domain of the lentil-chewing sandal-wearing lefties of the 1960s. Within a decade, people’s attitude towards ethical investing will be of equal importance as their attitude to risk.”
Five years on, the value of assets owned and managed by socially responsible investment funds in the UK has reached £12 billion, according to research firm EIRIS. Whilst this may ‘only’ represent 1.7% of all funds under management, the sector is growing and increasingly demonstrating that it can meet mainstream investor requirements better than ‘non-ethical’ options.
Not only do ethical companies perform better, but many ethical investments are less risky, and represent better long-term choices too. According to Simon Howard of the UK Sustainable Investment and Finance Association (UKSIF), “ethical investment is no longer just a moral issue. It’s a hard headed decision about the best way to manage your savings and plan for the future in a changing world.”
Ethical companies perform better
The evidence that it makes commercial sense for businesses to act according to ethical principals has become more robust in just the last few years. Academics at Harvard Business School recently compared the financial performance of different US companies since 1993 and found that the most sustainable significantly outperformed the least sustainable.
The reasons for this include a more engaged workforce, a ‘social license to operate’, better relationships, greater transparency and more innovation. To take one specific example of this phenomena in the UK, Marks & Spencer’s Plan A saved the company £135m last year, contributing to around half of the total amount paid out to shareholders through dividends.
Ethical investments are less risky
The traditional perspective on investment risk sees diversification as king and anything subject to a more limited range of options (like ethical investment) as subordinate. This conventional wisdom is being turned on its head however, as mainstream investment institutions prove themselves either unable or unwilling to adjust to new risks such as climate change.
Pension funds, for example, continue to invest at scale in fossil fuel assets through tracker funds. Yet they are failing to properly price the risk of a collapse in value of these assets in the event of stronger future policies to tackle carbon emissions, or alternatively, a downward revaluation in most other assets should such policies fail to materialise.
The latest warning on this front was sounded by James Cameron of Climate Change Capital: “Are they providing decent funds to safeguard our future, or are they doing exactly the opposite? Where is the fiduciary responsibility in the creation of risk and the potential destruction of value across the whole portfolio? How does the ‘beneficiary’ actually benefit in a world warmed beyond 2C?”
In contrast, the best ethical funds are already screening for these risks. In doing so they are choosing companies which are both contributing towards a more sustainable world, and reducing their own (and their investors’) financial exposure to the impacts of climate change and resource depletion.
Ethical investments are attractive long-term options
Focused as they often are on financing the infrastructure of the 21st century (like renewable energy), many ethical investments are also good long-term options. They are based on tangible assets providing benefits to the real economy, and in turn provide low-risk and sometimes inflation-linked returns over many years – attributes many of us look for when saving for the future.
The importance of investments capable of providing secure long-term incomes is revealed by data showing the dominance of income over capital appreciation in terms of respective contributions to investor returns. Since 1970 in Europe, for example, at least 80% of returns from investments in shares have resulted from dividend payments.
And whilst distinctly ethical investments may not be the only way to achieve such long-term incomes, they are often an effective and reliable way of doing so.
Of course none of this means that ethical investment has reached its zenith. Indeed some big issues remain. The higher management fees that can come with ethical screening can undermine the advantage ethical funds might otherwise have, and the growth of options to directly connect investors to specific investment opportunities is still in its infancy.
But it is clear that the benefits of investing ethically now stretch well beyond providing “lentil chewing lefties” with a clear conscience, towards addressing the fundamental investment requirements of hard headed pragmatists.