Typically, in the past, sustainable or ethical investing has been categorised as being for the minority however, research is showing that more and more people are investing in sustainable funds and not only that, in some instances they are out-performing traditional funds.
As time goes on this sustainable or ethical approach is seemingly moving towards the mainstream which can only be of benefit to our planet. We are going to delve into some of the main approaches, what they really mean and how it can benefit you.
Ethical Investing
Ethical investing typically avoids putting monies with companies and overall industries that create a negative impact on society and/or the environment. The sectors typically avoided are such things as fossil fuels (oil and gas), tobacco, gambling, weapons or animal testing.
Sustainable Investing
Sustainable investing will typically involve a fund manager pro-actively seeking out companies that are considered to have a positive impact on the world. This approach is considered less constrictive than that of ethical investing, as companies could be invested in that are offsetting against activities that could be considered unethical. An example of this could be fossil fuel companies who are investing themselves into renewable energy for the future. Again, this whole approach revolves around companies looking to a better future that is going to positively impact the world.
How are these investment approaches measured?
Many sustainable or ethical investment funds operate to specific ‘ESG’ principles to decide in which companies to put investors with. ESG stands for Environmental, Social and Governance and will typically consist of the following considerations in making their decision:
Environmental
- Impact on climate change
- Air & water pollution
- Energy efficiency
- Management of waste
- Treatment of animals
Social
- Human rights
- Gender equality
- Health and safety
- Consumer rights, privacy and data security
Governance
- Business ethics and overall culture/behaviour
- Their financial reporting
- The basis of a company’s ownership
- Remuneration for shareholders
How does investing this way affect underlying investment performance?
In years gone by, sustainable or ethical investment funds tended to lag in performance due to the constrictive view on assets they could hold. This would result in a trade-off for the investor, limiting their potential growth – this is all starting to change in today’s world.
As we mentioned at the start of this article, studies are showing underlying investment performance does not have to always suffer by constricting yourself to these investment values. Recent data has come out from Morningstar, a world-renowned investment research and investment management service company, seeming to indicate the opposite.
They made an examination of over 700 sustainable funds and compared them against some 4000+ traditional investment funds. The research found that in nearly all categories of investment, sustainable funds at the very least matched and in many instances out-performed traditional investment funds.
Further research came out from this study suggesting that in fact, sustainable funds fared much better in the recent (and perhaps yet to come) financial calamity that was Covid-19. This was likely due to these sustainable funds being much less reliant on performance from sectors such as oil and gas which was struck extremely hard. These funds tend to have large holdings in technology and healthcare which have done extremely well in recent times.
Further to all of this, sustainable fund managers have learnt due to recent events that by following this ESG criteria, they are avoiding risks. Two examples of this have been BP’s oil spill of 2010 and the Volkswagen ‘dieselgate’ scandal, both of which suffered huge share price shocks and would have hurt investors.
You can read more on this study here: https://www.morningstar.co.uk/uk/news/203214/do-sustainable-funds-beat-their-rivals.aspx
How does sustainable investing look in the long term?
Our take is that in this ever-growing sector of investment, things are likely to only ever get better.
As the world evolves, investors don’t just want good returns, they want to invest with a conscience. They do not want to see their money invested with companies that do not align with their own ethical values and indeed as we have already mentioned, they may be better off for being averse to the risks some of these companies present.
There are reports of large corporates across the world mandating these sustainable/ethical investments for staff pension schemes, to further boost the impact that they themselves have on the world which is further boosting popularity on a global scale. Attitudes of large-scale investors such as these, are going to make companies around the world change how they act to attract such investment.
Across the investment and pension solutions we provide, we are seeing time and time again, sustainable and ethically managed funds are rising to the top – they are aligning themselves with the global trend which we predict is set to only ever increase in the future.
At Osborne Financial, we take great care and pride in our investment advice. We take a really good look at your goals, timeline for investing, appetite to risk and put you in front of the best quality investment products on the market. Absolutely nothing we do is off the shelf; our investment advice is completely tailored to you through one of our experienced advisers.
Please do not hesitate to contact a member of the team if you would like to find out more about investment in ethically/sustainably managed funds.
The information provided on the pages, blogs and articles contained within this website are solely for information purposes only and do not constitute financial advice. Professional advice should always be sought from a financial adviser.