Wednesday 3 October 2018 12:01 pm

A guide to good money: How to invest ethically and sustainably


Good Money Week is now upon us. Launched in 2005, this campaign has nudged sustainable, responsible, and ethical financial products into the spotlight.

And it’s the investment industry where this trend has really gained traction, with terms like socially responsible investing (SRI) and “impact investing” coming to the fore.

Indeed, it wasn’t long ago that impact investing used to be a sideline consideration when choosing shares and funds, but it’s now entered the mainstream to become a core part of building a portfolio.

The shift has been prompted by the growing number of socially-conscious investors. “Demographic changes, social media, and awareness of the challenges facing our planet mean that investors are waking up to the fact that there really is no such thing as a neutral investment,” says Bevis Watts, managing director of Triodos Bank UK.

Perhaps it’s not surprising, then, that figures from Triodos estimate that – in the UK market alone – SRI will grow by 173 per cent to reach £48bn by 2027. Much of this is driven by younger generations, with almost half of investors aged between 18 and 34 planning to invest in an SRI fund in the coming years.

It’s not just that social values are becoming equally as important as the returns, it’s that more and more investors are recognising that they don’t have to sacrifice returns for the sake of upholding their values.

In fact, Liontrust’s Peter Michaelis stresses that companies which have a positive impact tend to have a competitive advantage – a fact which is still often overlooked.

If you’re just getting started, here’s what you should consider.

The seeds of growth

First, decide which type of investment structure you’re looking for – that is, whether you’re looking for direct shares in individual companies, specialist funds, bonds, or alternative options such as peer-to-peer lending.

If you want to select individual projects and get regular updates on the impact your investment is having, you should look to platforms like Ethex, which has a broad range of options on offer – from local community investments that help support social housing across the UK, to bonds that help to provide solar panels to families in Africa.

Lisa Ashford, chief executive at Ethex, says: “Our customers are motivated by making a difference. While the returns are important, we have a different approach to how we communicate our products.”

As is always the case with investing, it’s still important to diversify. So, if you’re selecting individual projects, avoid putting all of your eggs in one basket, and certainly don’t commit your entire life savings, particularly given these projects can often be really high up the risk scale.

Ethical conundrums

You might prefer to select a fund where a professional invests responsibly on your behalf. Many “ethical” funds also tap a broad range of companies, and will therefore diversify for you.

With a growing number of ethical funds to choose from, you should first ask yourself whether you want to invest ethically, sustainably, or both.

James Beaumont at Natixis Dynamic Solutions says that the answer will have profound consequences – both on the way you build your portfolio and how you measure the success or failure of that investment.

He points out that it’s unlikely that your entire investment portfolio could completely fulfil all environmental, social, and governance (ESG) criteria, and is more likely to be between five and 20 per cent.

While you don’t necessarily have to sacrifice a return to meet ESG values, Beaumont says it’s not appropriate to measure the success or failure of ESG investments solely on classic risk and return benchmarks.

“How your fund performs against classic investment benchmarks should be monitored, but it is also appropriate to monitor other factors more relevant to the beliefs which drove the investment rationale in the first place,” says Beaumont.

You should also consider the various approaches to SRI investing, because fund managers will operate using different strategies.

According to Peter Michaelis, head of sustainable investment at Liontrust, the traditional approach of ethical investing is to avoid certain industries because of the negative effects of their products – with the classic examples being tobacco companies and weapons manufacturers.

Other approaches are more interesting. “One is to invest in sustainable themes; this can be referred to as positive screening, because the funds focus on what they do want to invest in, rather than what they want to avoid,” Michaelis explains.

Funds may concentrate on single themes, such as renewable energy. Others have multiple sustainability themes that can include healthcare, resource efficiency, and education.

The third approach is engagement, also known as active ownership.

“In this case, fund managers engage with the companies they invest in so they can influence management into changing positively their strategy or operational management.”

While some asset managers focus on one of these approaches, others like Liontrust will combine all three.

“Many still cling to the perception that ethical investment is about what you can’t do, but we think it’s about what you can,” adds Michaelis.

You should also bear in mind that professional investors such as fund managers usually have more clout when it comes to getting business leaders to make positive changes to their companies.

Rob Stewart, head of responsible investment at Newton Investment Management, says: “There is much debate around whether investors should seek to avoid ‘sin stocks’ or whether they should be looking to drive change in companies where there is scope for improvement.”

Stewart says both views have merit, but points out that if we are to solve global issues like climate change, then shifts in behaviour are required.

Investors, he says, can play a key role in steering this. “Our approach focuses on driving change by engaging with companies – and we have found evidence that this can be a profitable investment strategy.”

Caution to the wind

But there are also factors that investors should be wary of, particularly as the SRI market is growing so rapidly, and standards are not yet set in stone.

Stewart advises investors to be cautious over “greenwashing”, which is where products appear to be environmentally friendly when they’re not.

“Investors should also be wary of the simple use of quant screens that claim to meet complex social and environmental issues. Often these screens fail to catch important nuances, and by simply investing in companies which are already rated “good”, investors miss out on the chance to drive positive change at companies which could do better.”

Indeed, the Triodos boss echoes this, saying that investors should be wary of investments that are labelled “sustainable” on the surface, when really they’re only improving questionable industries.

“A best-in-class investment in the tobacco or arms sector is not going to help make our society more sustainable,” he says, advising investors to look for shares or funds that apply strict sustainability criteria.

The other thing to bear in mind is that perspectives on what constitutes sustainable or ethical investments can differ, and Beaumont from Natixis says it’s not always clear how it’s being measured.

“There remains a large amount of dispersion across the industry in terms of both financial performance and its true level of sustainability or compliance with ESG investing principles,” he adds.

Perhaps there may come a time when all investing will be about doing good by people and our planet.

But what’s clear is that every investment has an impact on individuals, society, and the economy. It’s a relief that more of us are finally waking up to that.