The depth and diversity of responsible investing

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The outmoded perception that ethical funds are restricted to a small number of rigid moral issues can put investors off. Responsible investing now includes any investment making a positive contribution, writes Richard Essex.

Back in 2010 a survey commissioned by UKSIF (the UK Sustainable Investment and Finance Association), claimed 54 per cent of UK adults were interested in making a positive contribution to society and the planet with their savings and investments.

Frustratingly, however, total retail investment in ethical, sustainable, and responsible funds has remained fairly constant, at around two to three per cent of total investment under management.

So why this disconnect ?

A big problem is the lack of awareness and information that the average individual investor holds. There is still a common perception that responsible investing is restricted to a small number of ethical funds, which follow fairly rigid moral codes. There also tends to be the view that large sections of the investment universe are screened out and, therefore, there will almost certainly be a sacrifice to performance.

In fact, the responsible investment market has developed and diversified enormously over the last 10–20 years and offers a real breadth and depth of options reflecting the range of environmental and social challenges in the modern world. Responsible investing means any investment that is making a positive contribution to the physical, or social environment, upon which we depend for the future sustainability of our world

Yes there is still a place for the more traditionally ethical screened funds, but alongside these we now have sustainability, best of sector, themed funds and many more. Furthermore, many of these new funds do not screen heavily and their creators argue that taking a more sustainable response to investment actually increases investment prospects.

Before looking at these options it’s perhaps worth looking at the origins and development of ethical and responsible investing. The first ethical fund to be launched in the UK was the Friends Provident Stewardship fund in 1984. Paramount here was negative screening, in particular avoiding stocks relating to the social ills of the day such as alcohol, tobacco, weapons and animal testing. Classed as a traditional ethical fund now, the Stewardship Fund is still relevant in today’s market with the management having been taken over by Schroders.

Green issues

However, as the 1980s turned into the 1990s, environmental issues became more prominent. In response to this, funds started to emerge which aimed to provide solutions to environmental and social problems. One such fund is the Jupiter Ecology fund. Launched in 1988, its objective is to find investment opportunities which will benefit our environment. In particular, it tends to concentrate in three areas, notably infrastructure, resources and demographics.

Over the last 10 years or so the need to tackle big challenges like global climate change and resource scarcity has become more universally accepted. As such the term sustainability has become more significant. In other words society is beginning to recognise that the way we manage resources and invested capital needs to be sustainable.

A number of sustainability themed funds have entered the market. A common ingredient of these is the ever-increasing reliance on ESG measurement. ESG stands for Environment, Social, and Governance and is a more scientific, formulaic way for asset managers to value the overall responsible footprint of potential investable companies.

So we now have sustainability funds, such as the First State Worldwide Sustainability Fund, which works on more of a ‘best of sector’ basis. In other words they will look across all sectors and identify companies that are managing sustainable risks well and offer a positive impact in this regard. Another way of addressing this issue is for funds to address certain themes. The Web Sustainability fund, launched in 2009, follows this approach by concentrating on nine themes, including Health, Resource Energy, Sustainable Transport and Water Management.

The ever-increasing importance of sustainability and ESG has changed the narrative surrounding responsible investing. Rather than be seen as an investment process that excludes and, therefore, sacrifices performance, the application of this extra layer of analysis will enhance the longer term financial sustainability and performance of a fund’s holdings.

So responsible investing is now truly diverse and meets many different needs of potential investors who wish to make a positive difference in some way.

Richard Essex is an adviser with Grayside Ltd, a member of the Ethical Investment Association. He is the author of ‘Invest, Feel Good, Make a Difference’.

 

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Photo Credit: Eperales from flickr

 

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