B> spoke with Penny Shepherd, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), to gain insight and perspective on the current and future trends in ethical and sustainable investment from an organisation at the centre of the movement.
The world of financial services is notoriously fast paced; changes are not uncommon. In the ethical investment space this is particularly true at the current time with a number of key changes and new trends.
Penny Shepherd notes that, “One interesting development at the moment is that there is a lot of restructuring going on within the fund management industry as a whole, particularly in the area of actively managed equity funds.”
Indeed, recent announcements from Henderson Global Investors and Aviva with regards to their specialist sustainable and responsible investment (SRI) teams have caused somewhat of a stir in the industry.
Retail distribution review
However, it is the Financial Services Authority’s (FSA) consumer protection policy, the retail distribution review (RDR), that leads the discussion.
Shepherd begins, “We’ve also got the retail distribution review being implemented over the next year”, which, among other changes, will ensure adviser charge transparency. From December 31, 2012, consumers will pay advisers fees for financial advice in advance rather than using a potentially biased commission-based payment system.
“This clearly makes a lot of sense from the point of view of ensuring that consumers get good and impartial advice.”
RDR also requires that financial advisers be appropriately qualified. Despite the merits of RDR, there is some concern that fewer people will be willing to accept advice on that basis. So where does that leave ethical investment in particular?
“Certainly from an advice point of view, it is hugely positive, because it makes sense for advisers to understand their clients in more depth and increase their skills in advising on green and ethical investment.”
I think more support for people’s financial needs is great, but there is a danger that advisers may then have a very limited range of investment products and only look quite narrowly at what is appropriate for clients
There is a down side though, because some advisers expect a move away from investment advice to focus on consumers’ basic financial requirements.
“I think more support for people’s financial needs is great, but there is a danger that advisers may then have a very limited range of investment products and only look quite narrowly at what is appropriate for clients.”
If such a shift occurs, it could create an opportunity for those advisers who are incorporating green and ethical considerations into their advice process. Shepherd believes the challenge is that if consumers don’t go to those with expertise in the area “green and ethical considerations may not be fully taken into account in the advice they receive”.
Another significant opportunity for increased ethical investment is through workplace savings schemes.
The opportunity is partially driven by the changes to the advice environment but also by an increase in recognition that there are other forms of savings beyond pensions that it makes sense to support in the workplace”, says Shepherd.
Because of an increased focus on encouraging people to save through their workplace, “there’s a huge opportunity for those employers who are leaders in corporate responsibility to make sure that the workplace savings support available to their employees take account of green and ethical factors”.
The announcements from Henderson and Aviva caused somewhat of a stir in the ethical investment space. Shepherd explains the rationale behind Aviva’s decision: “Aviva Investors has done a wide-ranging review and decided to shift their allocation focus, and to rationalise their support for equities. In association with that they are making some significant workforce cuts”.
In other words, these are organisation-wide developments that then have implications for the provision of responsible investment support. Shepherd says that the underlying point is that SRI is getting caught up in wider industry changes.
In fact, the first thing that Aviva did was reaffirm its commitment to engaging with companies on responsible investment issues. “On the one hand, you’ve got the commitment to integration and engagement across the business as a whole”, says Shepherd, “and then on the other hand, you have got what is clearly a disconnect between its new strategy and the sustainable future funds”.
Indeed, the new strategy involves a departure from active equities and retail distribution and most sustainable futures funds are actively managed, mainly equity-based products, with a retail-focused client base, at which point the disconnect seems obvious. “Frankly, it is more about the financial characteristics and market focus of the funds than it is about their sustainability characteristics. It’s one of these instances where you have to look through a wider industry lens to know what’s going on. It’s not an SRI specific development”.
Shepherd believes that on-going restructuring will most likely result in a greater degree of polarisation. Major investment houses may tend to focus on offering integration and engagement rather than specialist strategies. While specialist sustainability funds are more likely to be delivered through medium-sized institutions in which sustainability strategies form one of a limited range of strategies.
A good example of such a shift comes in the form of a recent announcement that a large part of the SRI team that left Henderson Global Investors last year has joined WHEB Asset Management. Shepherd says, “My understanding is that what they’re planning to focus on there is thematic investment—investing in the positive rather than avoiding the negative”.
The question is: what effect will the restructuring and shifts have on the ethical investment landscape?
It makes sense for advisers to understand their clients in more depth and increase their skills in advising on green and ethical investment
Shepherd says that one of the advantages of having more of the specialist strategies in medium sized houses is that all parts of the market will be in a position to promote what they are doing. “I think the restructuring introduces the potential for a
greater marketing focus and also potential for more innovation […] Because large investment houses inevitably have to decide which investment strategies it sees have greatest marketing potential, in recent years, sustainability funds have sometimes lost out”.
Positive or negative?
One of the current challenges “is the perception in some parts of the market that green and ethical investment must include negative screening. But in fact there is a wide range of techniques”.
Shepherd uses the analogy of excitement over innovation in mobile phone payments being equally matched by public outcry over the attempt to withdraw the cheque book.
“The traditionally ethically screened funds are the cheque books of the responsible investment market. They are an option that meets the needs of a proportion of investors. But they are not where the innovation is taking place. And they are not appropriate or the preferred choice for every responsible investor.”
Indeed, the debate is increasingly around the positive option. Shepherd welcomes the shift in the discussion, if only “so that we can have a conversation like this and your wrap up question isn’t ‘Penny, tell me what people really want to avoid’ […] Perhaps, in the past, the message has been too negatively biased, so now we need to look a little broader. The area of innovation is focusing on the positive”.
UKSIF’s role through the changes
“UKSIF is very much continuing to support those areas where it makes sense for everybody involved in green and ethical investment to work together. In particular, we coordinate National Ethical Investment week, which is in October this year, it will be the fifth and we really feel momentum building”.
Another key area is in the increasing focus on stewardship. “Our research for National Ethical Investment Week last year found that about 25% of British adults with investments said that they were told too little by their financial advisor or pension fund about responsible ownership. So support for responsible ownership is one focus area.”
It is also an area that John Kay in his review of UK equity markets has highlighted, in particular, how one creates an environment within which there is effective stewardship by investors of UK companies.
A second area of interest for UKSIF is the rise of social impact investing, where there are an increasing range of products coming to the market. The European Commission is planning a social entrepreneurship fund label to help investors to better identify social impact funds.
Peer-to-peer lending and microfinance
Though peer-to-peer lending has the potential to lend to individuals, Shepherd thinks what is particularly interesting is peer-to-peer finance as a means to lending to small business. There is also potential for peer-to-peer finance to support green and social projects, building on initiatives like Kiva and Lend with Care, which is in association with the Co-operative.
“What’s interesting is the opportunity that it introduces—connecting people more directly to how their money is generating wealth—and also the way in which it provides competition to the traditional finance sector. And that sort of competition is healthy.”
Why is peer-to-peer or microfinance proving so popular? Firstly, Shepherd says, there is greater interest in understanding and having greater control over how money is used following the financial crisis. Secondly, it’s part of a broader trend of using the Internet as an alternative to traditional services and intermediaries.
But what makes peer-to-peer funding really exciting is that it has the potential to offer a disruptive innovation challenge to traditional financial services.
“The way that disruptive innovation traditionally works is that a new product or service will come along and, in the early days, the established players in an industry won’t see it as a competitor because it offers something slightly different.”
Shepherd offers another analogy, this time in technology. “When Microsoft and Apple started up, the established player in the computer industry said ‘these people are irrelevant to us’. But, because there is a different market for that service, over time it develops to a point where it can compete with existing providers.”
What peer-to-peer finance can offer is a better connection with the end user of the money alongside a different approach to risk. Over time, Shepherd believes these services, by developing their track record, may start to compete with the established financial services providers.
“That would be hugely exciting. It introduces an incentive for financial services to respond. And in that instance, who the winners and losers are in the long term very much depends on how both new and existing players react”.
This feature was originally published in our Guide to Sustainable Investment, which you can download for free here.
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