Sustainable investing and ESG investing are officially booming. Not only are people becoming increasingly motivated and aware of the need to invest sustainably, but the people who manage our money are too.
In the first 2 quarters of 2020 a record $90 billion has flowed into ESG-style funds, reflecting this demand. Many fund managers will tell you that good financial performance doesn’t need to be sacrificed either, with the performance of sustainable funds more than comparable to traditional funds (refer article “Majority of ESG funds outperform wider market over 10 years“, FT article: http://bit.ly/sustfundsLast).
Sustainable funds overall exhibit greater longevity with 77% of ESG (Environmental, social and governance-focused) funds that were around 10 years ago still around today, compared to less than half of traditional funds still around today (source: Morningstar UK).
Fund managers today regularly talk about integrating ESG into the investment process, and record numbers of new funds and re-named funds (with ESG integration) have emerged. This is a huge step forward that cannot be underestimated.
Why do you think we are seeing these changes?
They could be attributed to:
(1) The visible and invisible effects of climate change on our attitudes to well-being, and in turn, investing. Living through this pandemic is causing more of us to review how our lives are being lived, and the effects of humanity upon our planet. Typically it takes a large shock for us humans to change behaviour in a meaningful way ;
(2) A global trend in the way we treat investing, not focusing purely on profits for shareholders anymore, but determined to measure and review corporate management behaviour and the environmental and social impacts of every company’s activities (to mention a couple of alternate measures very briefly).
What do you think are the other reasons for such a shift toward ethical and sustainable investing?
Socially responsible investing really started with a focus on what investors don’t want, for example avoiding fossil fuel-investments and/or environmentally-harmful practices, or those involved with socially irresponsible practices like sweat-shops and slavery. Many managers talk about this approach still today, in terms of how they define their investment universe.
Instead, Impact investing focuses and supports investment in companies and their related projects designed to have positive environmental or social impact in the world, alongside financial returns. Examples include companies providing access to education, energy, water or healthcare, affordable housing, renewable energy companies, and micro-finance investments.
Guidelines for fund managers could include for example measuring how a company will make progress toward specific Sustainable development goals. (see the goals: https://bit.ly/2EFQFvA)
There are companies who believe in and build sustainable practices from the ground up.
How does an Investor choose in 2020 ?
There is no standardised process or practice for investors to self-educate about investing in a sustainable way, however there are many useful resources and advice available today. The various descriptors or labels such as ethical, responsible, sustainable, impact investing etc can be seen as simply filters to help you narrow down how you want to invest.
The first step for investors and pension-holders is to ask yourself ‘How can I align my own ethics and values with my investment choices?’
To do this, aside from some useful introspection and contemplation, you will need to look beyond ESG ratings and fund labels, and attempt to understand what the investment portfolio is designed to achieve. An adviser can help you discover these objectives.
There’s no doubt, that through your own research, talking about it with those around you whose opinion you trust, you can change how you invest (and even affect your own employer’s investment choices potentially).
Times have changed. We are no longer investing in a vacuum, or just to ‘make money’ or to ‘not lose’ our pensions or investments. There is a new context. You might call it investing with a conscience, and not leaving it to a chosen few.
You can get on a path to aligning your financial support of investments and pensions not only designed to grow your wealth or retirement money, but to be in alignment and integrity with your own values and ethics, and in doing so become part of a greater change that you want to see in the world. For anything to happen, it does start with you.
What’s important to you, anyway?
*Please note this is only a brief summary, critical for the world we live in, and only intended as an introduction, and not tailored financial advice. Contact me for more information and assistance.