Just a year ago I wrote an article on Ethical Investing and I concluded that it was “not exactly the Age of Ethical Investment, but the trend is definitely there”.
Things have moved on to such an extent that I don’t think we can say that any more.
Ethical investment, particularly in terms of ESG (Environmental, Social & Governance), is now moving firmly into the mainstream.
For many years there were a small but established band of fund managers offering “ethical” funds, sometimes labelled Socially Responsible or Sustainable.
F&C, Jupiter and Royal London had high profile ethical investment offerings.
But now the number of investment companies launching whole new ESG ranges or beefing up existing, low-key ESG fund capability is astonishing.
Major companies are responding to their customers’ concerns by embracing more socially responsible policies.
There is almost a feeling that it won’t be possible to be profitable in the coming years without companies taking into account the environmental and social side of their business approach. The natural outcome of this is that investment managers will tend to buy shares in companies that follow ESG models.
It could very well become a self-fulfilling prophecy that the only investments worth holding will be ethical ones. Even fund managers that don’t officially enshrine ESG principles in their investment range, will have to use them in order to make money for their clients.
MSCI, a provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools, cites the wide reach of ESG which today covers everything from climate change to corporate behaviour.
It notes: “Global sustainability challenges such as flood risk and sea level rise, privacy and data security, demographic shifts, and regulatory pressures, are introducing new risk factors for investors that may not have been seen previously.”
Common approaches include ruling out companies that fail to meet certain basic standards on, say, human rights, bribery or the environment, plus those involved in allegedly harmful sectors such as weapons; active ownership designed to effect change; socially responsible investing; and faith-based investing.
Against this the widespread fear among fund managers and others was that ESG compromised financial returns.
However MSCI cites cases where companies with robust ESG practices have displayed a lower cost of capital, lower volatility, and fewer instances of bribery, corruption and fraud over certain time periods. Conversely, some companies that performed poorly on ESG battled to their detriment with spills, strikes, fraud, accounting and other governance irregularities.
It added: “Numerous academic and investor studies in recent years have found historically lower risk and even outperformance over the medium to long term for portfolios that integrated key ESG factors alongside rigorous financial analysis.”
Yet none of this is straight-forward.
Witness the recent row over the Archbishop of Canterbury Justin Welby criticising Amazon and then it being revealed that the Church of England is heavily invested in Amazon. Hypocrisy? The Church argued that maintaining a shareholding in the company provided the opportunity to influence its actions.
Mike Webb, chief executive of Rathbone Unit Trust Management, told Investment Week: “Until recently, ESG was seen as relatively niche. Either negative screens that filter out things like oil, tobacco and animal testing, or high-risk investment in bleeding edge capital for renewable energy or charitable ventures where the return is either negligible or non-existent.
“Things have changed. ESG is now about positive impact – asset managers making a difference by using financial clout as shareholders to hold company managers accountable for how they treat workers, the environment and society at large.”
He described it as a “heartening phenomenon”.
No longer then confined to the long hair and open sandal brigade!