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Investing with a conscience
Issues such as climate change and sustainability have become increasingly hot topics around the world, consistently making headlines and often the subject of conversation. Whether it be politicians debating environmental policies, 17-year-old Nobel Peace Prize-nominee Greta Thunberg addressing the UN, movements like Extinction Rebellion making the front pages with their protests or A-Listers such as Joaquin Phoenix speaking out at the Oscars, environmental responsibility is rarely out of the news.
It has also become much more of a concern in our everyday lives, with increasing pressure to reduce single-use plastic and meat consumption, and move towards more sustainable and ethical choices when it comes to everything from fashion to energy suppliers. But, for those who want to do more than buy a reusable straw and don a recycled garment, reassessing our finances in the same way we are encouraged to reassess our day-to-day lifestyles can have an equally important impact.
Ethical investing is no longer the niche option it once was. It is fast rising in popularity, and, perhaps surprisingly, becoming ever more lucrative. Over the past five years, sustainable investing has increased significantly, growing 38% between 2016 and 2018, when it reached $12 trillion globally, according to the US SIF Foundation.
According to a recent survey by Professional Advisers, 62% of clients aged between 40 and 60 expressed an interest in sustainable and responsible investment and almost half of high net-worth individuals asked about environmental, social and corporate governance (ESG) options.
Nine out of 10 advisers in the study said that clients cite environmental or societal concerns as their main objective for investing in sustainable funds. Only 2% said they thought investors were looking for higher returns.
In response, more financial advisers are becoming well-versed in such investment opportunities, with 69% directly asking about sustainable investment in their fact-finding, and 72% currently offering sustainable investment options.
And it is not just “green” issues that investors are paying attention to, either. ESG investing takes into consideration three main ethical factors:
Environmental – How companies are making an impact in terms of climate change, air and water pollution, energy efficiency, water scarcity and waste management.
Social – How companies impact their employees, clients and wider communities in terms of health and safety, data security, consumer privacy, gender equality and human rights.
Governance – How companies are governed or managed in terms of business ethics and culture, company ownership, financial reporting, board structure and executive remuneration.
It is an umbrella term that takes account of a range of different factors, some of which may be a higher priority for you than others. It is important to speak to your financial adviser about the options available, and how they align with the specific ethical issues of interest to you.
Sustainable investments, for instance, could mean environmentally friendly or “green” investments, which seek to make a positive impact on the world and reduce the effects of climate change. It could also mean those that focus on animal welfare, reducing poverty or working towards gender equality. The term can refer to companies that manage their carbon footprint, ensure labour laws are upheld throughout their chain, or engage in a number of other practices with social and environmental benefits.
There is no official definition, but The Global Sustainable Investment Alliance (GSIA) defines sustainable investing as encompassing seven main activities. These are ESG integration, sustainability themed investing, norms-based screening, positive best-in-class screening, negative/exclusionary screening, corporate engagement and shareholder action, and impact/community investing.
From private equity to pension funds, more ethical options are becoming available across the investment market. Even big companies are getting onboard. Wall Street giant Goldman Sachs has declared a commitment to “sustainable finance”. Goldman Sachs recently announced a 10-year, $750 billion initiative committed to investing in financing and advising companies with sustainable goals. It is focusing on areas such as clean energy and has overhauled its lending policies to exclude Arctic drilling and similar ventures deemed unsustainable.
As well as discussing your priorities when it comes to ethical investing, speak to your financial adviser about exactly what the potential investment’s impact is in terms of climate change, human rights or whatever your key areas of interest are.
Some portfolios simply exclude investments such as oil, others may take into consideration the ethical business practices of the companies, and others focus on companies that are actively delivering positive social or environmental results – which is likely what most people think of when they consider ethical investing.
Making ethical investments isn’t entirely altruistic, either. Global business is moving towards sustainability and companies are becoming increasingly transparent when it comes to ethics and societal impact. Ethical investors are seeing returns on their capital, making this area of the market potentially as good for the finances as it is for the conscience.
While the ethical investment sector currently only accounts for 2% of funds in the UK, according to the Investment Association, figures from market analysts Good With Money show 11 out of 16 UK-focused ethical funds outperformed the average return. In addition, over one year, the average UK fund fell 1% while ethical funds were up nearly 3%. Over five years, the average UK fund rose 37%, whereas the ethical UK funds went up by 47%.
If you are interested in making a new investment or reassessing your current portfolio to see if it could be aligned with more ethical businesses, make an appointment to speak to one of our financial advisers today.
As with any investment, there are risks involved, and capital can decrease as well as increase. It is important to discuss with your financial adviser the levels of risk you are comfortable with and which investments might be best for your financial situation.