Should I Invest Ethically?

Should I Invest Ethically?

It is only in the past few years that ethical investing has really started to grow in popularity and is now being taken seriously by many investors.

In 2021, the government released a new policy paper ‘Greening Finance: A Roadmap to Sustainable Investing’. A Global Investment Summit was held in October, COP26 aiming to position the UK as the best place in the world for green and sustainable investment.

Below we will take a look at what ethical and sustainable investing is and how the sector is likely to evolve.

What are ethical investments?
Ethical investments have a positive impact on the world while also aiming to make a profit. It means you get a financial return without sacrificing your social, moral or religious principles. Ethical investments focus on areas such as climate change, animal testing, workers’ rights, tobacco, the arms industry and gambling.

But can you invest ethically?
It’s now much easier to invest because there is a lot more choice in terms of ethical and sustainable investments than there where a decade ago, or even 12 months ago.

Ethical investing means different things to different people so there is no industry-standard approach:
Under the umbrella of ethical investing are:
Socially responsible investing (SRI)
Environmental, social and governance factors (ESG)
Impact investing
Sustainable investing
Although the range of labels isn’t necessarily that helpful. The bottom line is that you’re choosing investments that have a positive impact on the world.

Do ethical funds underperform?
There is a common misconception that in order to invest ethically, you have to compromise on growth. There is no evidence that ethical funds underperform, in fact a number consistently beat many of their non-ethically screened peers.

Interestingly, if we look at two potentially competing indices it will shed some light on the subject. The last 5 years performance for an International Index Tracker versus a Socially Responsible International Index Tracker:

 09/02/17 To 09/02/1809/02/18 To 09/02/1909/02/19 To 09/02/2009/02/20 To 09/02/2109/02/21 To 09/02/22
L&G International Index Tracker    +6.27%  +6.36%  +21.44%  +12.55%  +13.66%
L&G MSCI World Socially Responsible Index  +2.84%  +3.28%  +17.82%  -(5.81%)  +16.15%  

One way of interpreting the stats above is to say the Ethical Index is starting to overtake the ordinary index, but only time will tell!    

However, many do not, as there are a number of factors which influence the overall performance of all funds. With actively managed ethical funds, the main things to look out for:

Does the fund have a clear investment strategy?

The length of time the main fund manager has been in the role.

How does the performance compare with other alternatives?

How big is the ethical investing sector?
Ethical investing is still relatively small in the grand scheme of things, but it is growing rapidly. Funds that specifically invest according to ESG principles attracted net inflows of $71.1bn globally between April and June 2020, according to research firm Morningstar.

This takes the total for assets under management in environmental, social and governance (ESG) funds to a new high of just over $1trn.

ESG fund flows represented almost a third of all European fund sales.

The investment industry has been responding to the growing trend, with more than 70 ethical funds being launched during the first three months of 2020. This brings the total to over 2,500. 

What is the future of ethical investing?
Traditionally, the focus of ethical investment funds and sustainable funds was more on the screening out companies that produced products in conflict with an ethical investor’s values.

Fund managers and individual investors would often avoid investments in arms, alcohol or oil companies for example. But now, rather than just removing the companies that are unethical, it’s increasingly about choosing to invest in companies that are planning to make a positive impact.

Going forward…
The majority of investment managers believe the industry is only going to continue to grow, driven by young people. By 2025, millennials will make up 75% of the workforce, according to the professional services firm Deloitte. This means there could be a huge shift in pension investment as well as the wider spending power that accompanies this shift.

Therefore, just as younger generations may have strong views on the brands that they favour, they are now increasingly applying the same ethical considerations to their investments.

That’s not to say older investors aren’t also looking in more detail at how their money is invested. Someone who has made a conscious decision to buy an electric car might start to wonder why they are investing in fossil fuels. 

Research from the ethical bank Triodos in January 2021 found that almost 20m Brits plan to be more ethical with their money.

So, the sector will almost certainly continue to evolve, with more mainstream ‘responsible investment’ approaches sitting alongside pioneering impact investments. If you have any queries on investing ethically, please speak to your usual adviser.