The rise of responsible investing
Evidence now suggests that ethical, sustainable and socially responsible investing can be equally lucrative as less morally conscious instruments...
Environmental Social Governance (ESG), ethical, sustainable, socially responsible investing (SRI)…with its many labels, has become the buzz word of investment groups in 2018.
Historically, ethical or socially responsible investing was thought of as a strategy for people who put morals above profits. Those who constrain their investments for ethical or moral reasons could, in theory, risk underperformance. However evidence now suggests that the opposite is true and many of the world’s largest companies are now considering sustainability as part of their long-term business strategies.
With over $20 trillion globally (more than a quarter of the world’s professionally managed assets) there has been a significant increase in assets dedicated to this type of investment.
The most frequently asked questions about sustainable investing still relate to performance. There is no reason to expect a broad-based SRI investment will perform worse than a traditional stock portfolio. In fact Morningstar recently stated “The weight of academic research on the performance of sustainable/responsible portfolios, mutual funds and indexes suggests there is no performance penalty.”
SRI has advanced from purely avoiding ‘sin stocks’ such as tobacco, gambling and alcohol, and towards to a style of positive involvement. There are three key areas in responsible investing:
Environmental - How does a company's activites impact on the world? If they pollute for example, what steps do they take to reduce their contribution to things like global warming?
Social - Factors like how a company treats its workforce, suppliers and customers.
Governance - This relates to how a company is run. Does a company have the right structures in place to ensure it is well managed? And how does it decide executive pay?
Asset managers today believe that integrating these fundamentals of sound corporate governance, solid business ethics and strong management of environmental risk will play an increasing role in delivering investment performance.
Many ‘solutions-focused’ companies are leading the way in technologies that may help solve some of the world’s most challenging problems, such as alternative energy, water conservation and climate change.
Investment managers engage with the companies they are considering investing in and continue to engage after investment as part of their monitoring programs. Active engagement with company management allows shareholders the power to influence corporate culture, with many shareholders now coordinating their efforts to effect change.
Fund managers are increasingly adopting the view that integrating ESG in an effective way can help reduce risk, as neglecting social or environmental practices can put companies in jeopardy of a whole range of costs, regulatory fines and also loss of reputation.
In recent years a series of high profile company scandals (Volkswagen’s emissions crisis, Miramax, Sports Direct pay row) have enhanced the case for integrating ESG factors into investment decisions. Indeed Equifax, the credit reporting agency, was downgraded by major ESG data providers due to concerns over data security issues 18 months prior to the scandal that saw hackers break into company files, comprising of 143 million Americans security details and wreaking havoc on its stock price. Amongst the largest shareholders were many mutual funds.
Which SRI fund is right for you?
ESG funds would be suitable for the long-term investor who wishes to align their finances more closely with their values without sacrificing performance.
With the trend of responsible investing growing the biggest challenge for the investor can be the lack of clarity over what constitutes an ESG fund. Due to the rapid growth of interest in this strategy from the investing mainstream, Morningstar have introduced the Sustainability Rating for funds, a tool that helps investors to assess funds' underlying holdings on environmental, social and governance factors. The MSCI ESG Fund Metrics ranks over 20,000 mutual funds and ETFs considering over 100 ESG metrics. However, one should note that the lack of resources available to some smaller companies can be a challenge, creating a bias towards larger firms as they report on ESG factors in greater proportion.
The current popular ethical rhetoric has seen many funds merely satisfy ESG requirements on a surface level, ‘ticking the box’ of this growing trend.
Below are some examples of funds, picked by our Investment Manager, Sheridan Admans, that are currently active in this space and for whom ESG is fully integrated into their strategy, placing it at the heart of what they do.
Established in 1999 EdenTree are considered early pioneers within SRI investing and Amity International is one of their flagship funds.
EdenTree have taken a leadership role in managing ethical investments through research, engagement and strong fund performance. In 2017, for the ninth consecutive year, they were awarded the Moneyfacts Award for Best Ethical Investment Provider.
Investors who prefer an equity fund that is conservatively managed, with an ethical/socially responsible stance and who are looking for a tried and tested fund manager in this still niche investment approach will find this fund suitable.
F&C are one of the leading players within the field of SRI investing, as evidenced by their large Governance and Sustainable Investment team and the Independent Committee of Reference. In addition to their SRI-specific funds they actively engage with companies on SRI issues as a central part of their investment philosophy, which is known as their Responsible Engagement Overlay (REO).
The fund invests in the shares of a broad range of UK companies based on the team’s view of their long-term return prospects. It will invest only in companies that meet the team’s rules for environmental and social responsibility.
The team's process, which has been honed over more than 15 years includes screening criteria, sustainable investment themes and company specific ESG issues.
This fund is designed for socially responsible income-seekers who want limited exposure to risk. The aim is to provide a regular, above average income through investing in a range of bonds and bond market instruments that meet strict criteria ethically and financially. Rathbone Ethical Bond is in the top 10 best performing Sterling bond funds over 3 and 5 years, with returns regularly beating rivals without ethical principles.
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