There are eight myths about sustainable and responsible investment (SRI) that Richard Essex says must be broken; eight myths that, he adds, are currently being broken by the genuine SRI industry that is happening right now.
This article is an extract from Richard Essex’s 2014 book, Invest, Feel Good and Make a Difference, which is available now on Amazon.
Myth one: my money won’t make a difference
Your money is already making a difference. Alongside government intervention, we are already making dents in some of the world’s most pressing challenges. For example, according to a United Nations report in 2012, investment in renewable power and fuels experienced a 17% increase from the previous year. In addition, this investment has spread to far more countries, meaning more countries are now focusing on clean energy targets. As the economy is becoming more constrained by environmental and social pressure those that are meeting these challenges head on are creating far more investment opportunities for you the investor.
Myth two: I can’t get a healthy return investing this way
This just doesn’t stand up. SRI funds, that you can access, will be investing in those companies that are meeting these challenges and these companies have a better chance of succeeding financially in the future. These could be companies tackling issues directly, such as Scottish and Southern, who are now one of the leading renewables producers in the UK. Because of their innovative approach they are now able to offer a dividend of around 6%, which is helping to support a sustainable share price.
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Equally, they could be companies like Marks & Spencer who are successfully moulding environmental and social sustainability into their operations, thereby benefitting financially. By achieving results such as cutting down food packaging by 20% they have helped to reduce their bottom line costs and improve profitability. This is being reflected in a share, which is paying a healthy dividend, well above the market average. SRI fund managers will be investing in a mixture of companies that understand and care about their responsibilities. The kind of evidence above is showing that this offers a more financially sustainable return for you, the investor.
Myth three: the market is not mature enough
The SRI sector is no longer a fledgling industry. As far as individual investors are concerned, the size of funds under management has increased significantly. To be specific, SRI funds under management in the UK have grown from £312m to around £10 billion over the last 20 years. This growth ignores the large increase in SRI exposure within the institutional sector. This includes occupational pension schemes, which are paying far more attention to this area.
Equally, the range of fund styles have developed dramatically. In order to meet investor’s differing preferences towards SRI there are a variety of styles available. Additionally, there are a number of underlying factors that support a far more mature industry. For example, environmental technology is far more advanced creating many more cost effective processes. The National Renewable Energy Laboratory in the US issued a report in 2012 saying that costs could be reduced by as much as 30-40% over the next decade. Finally we, as consumers, are far more educated and attracted to supporting the environment than we were a decade or so ago.
Myth four: I can’t see where I’m investing, therefore I don’t feel engaged
This fear is perfectly understandable given recent events in the financial sector. One of the spill-outs of the financial meltdown in 2008 was the realisation that so many market assets suffered from a complete lack of transparency. Extremely dangerous, as it turned out, as so much of this so-called wealth had no real underlying value.
In total contrast, SRI funds depend on transparency for their success. In fact, the origins of these funds derive from an investor’s need to recognise that they are making a positive contribution. As a result, there is a greater commitment by fund managers in this sector to communicate with you, the investor.
Myth five: I have no trust in how my investments are managed
A survey carried out by Lloyds TSB in 2012 showed that confidence in the UK stock market was hovering at 29%. People’s trust in investing is at an all-time low and there is good reason for this. A series of financial mishaps over the last decade has severely dampened the performance of the stock market over this period. However, just as financial mismanagement and poor transparency has created this lack of trust then more responsible and open activity will have the opposite effect.
The building of trust with investors is integral to the SRI industry. As a result, SRI fund managers will carry out a more in-depth research process, including analysis of environmental, social, and governance (ESG) factors. Evidence is now showing that when this is combined with financial analysis a shareholding is more likely to achieve long term sustained performance. Additionally behavioural finance research supports the view that investors, on the whole, are more concerned with longer term sustained performance.
Myth six: I can’t spread investment risk investing this way
Other than just considering specific risk that applies to an individual company or stock, risk needs to be considered in a wider context when planning an investment portfolio. In particular, research has suggested that a spread of asset class and investment style is important in providing a well balanced portfolio.
A criticism of the SRI sector in the past was that it did not offer this diversification. This is no longer the case. SRI filtered funds now can include a number of different asset classes, including shares, corporate bonds and property. In addition the range of funds includes a wide array of styles. These different styles mean that, as a SRI investor, you can invest in larger, more established, sustainable companies, as well as emerging companies who are making a more direct contribution to a more sustainable future.
Myth seven: I’m worried about moving 100% in this direction
It’s still very rare for existing SRI investors to place all of their wealth in funds within this space. This is partly because this area is still developing and can’t currently satisfy every investment requirement. For that reason you should not feel guilty if you only invest a proportion of your money in this area.
The real challenge for the SRI industry is to move from the margins to the mainstream so that greater impact can be made on the social and environmental challenges that face us. There will be more effective change if broader exposure is obtained from the wider market rather than just concentrate on the existing, traditional, ethical investor.
Myth eight: I want to leave a positive legacy with my investments but feel helpless on my own
You don’t have to feel you are on your own; on the contrary, you can become part of a movement. This is a movement that I believe is currently moving SRI from the margins to the mainstream. The evidence suggests that SRI has now gone through the early development stages and a recognised movement has now been formed.
Indications of the importance of supporting a sustainable economy can be seen in the way government policy is being framed. In the UK, for example, we have seen government initiatives like the green deal and Green Investment Bank both supporting the importance of a sustainable environment. When you consider how much SRI investing has increased over the last 20 years (see myth three above) then you will realise that you are far from an extreme, far out, treehugger but in fact part of a growing, established, responsible movement.
Richard Essex is an independent financial adviser with Grayside Financial Services, where he is a specialist for green and SRI advice. He is also on the steering committee with the Ethical Investment Association, a member of the UK Sustainable Investment and Finance Association (UKSIF) and the author of the 2014 book, Invest, Feel Good and Make a Difference.
Photo: David Ritter via freeimages