It led to pressure on companies to focus solely on short term shareholder value, sometimes at the expense of other stakeholders (such as customers or broader society) and putting at risk longer term returns.
Given that your pension is itself an investment for the longer term, you don’t really want it being subject to such myopic management.
Sustainable investors have long known that it is important to take into account more than just the immediate context of a company’s quarterly results.
The first socially responsible investors (SRI) wanted to be sure their savings were being used in accordance with their own beliefs and values, regardless of the implications for investment returns.
Increasingly, more people are coming to realise that the environmental, social and governance (ESG) issues that exercised those SRI pioneers are not just about ideals – they are about value as well.
You only need to consider the recent floods in the UK, the furore over how much company bosses get paid or the fallout from last year’s horsemeat scandal to realise that these ESG factors can have a serious impact on the profits of the companies in which you invest – and therefore they have a direct effect on the size of your pension.
A whole host of different factors are making it more important that investors take sustainability issues into account.
As the world economy becomes increasingly globalised, a growing population and an emerging middle class in developing economies, which is clamouring for the good things in life, are colliding with limits to growth including food shortages, resource scarcity and environmental degradation.
On top of this, we are all having to deal with the impacts of extreme weather events, whether that is droughts in prime crop-growing areas in the US and Eastern Europe or floods at home and across Europe.
These are becoming more frequent and more intense, with scientists increasingly certain that man-made climate change is behind these alterations to our weather patterns.
At the same time as these “top down” pressures are occurring, there are pressures from the other end of the economic chain – from us as consumers. In our connected world, people are now more aware of the impacts of their own actions – and the impact of the companies whose products they buy.
And now, social media allows people to do something about it and hold companies to stricter standards than they have in the past. That means businesses that are perceived to be acting in an irresponsible manner will be punished for it – recent examples include the demise of the News of the World, forced to shut in the wake of phone-hacking revelations and BP, which is still suffering the after-effects of the oil spill at one of its wells in the Gulf of Mexico.
It’s not just consumers and investors who are more aware of all of these issues – politicians and regulators are, too. Companies and shareholders have to consider not just the factors highlighted above but also how regulators and policymakers deal with them.
Academic studies support the view that more sustainable companies are more likely to be successful. A recent paper from the Harvard Business Review found that ‘high sustainability firms outperform low sustainability firms in both stock market as well as accounting performnance’ [Eccles Iannis, Serafeim, 2013]
As a result, the major criticism of sustainable investing – that it meant sacrificing returns – is increasingly untenable. Indeed, Moneyfacts pointed out last year that ethical funds have outperformed their non-ethical counterparts over one year and three years, while sustainability issues are becoming more and more embedded in mainstream investment.
The factors that have brought this about are only going to become more important in the years to come, meaning that companies that operate more sustainably will be better investments in the long term than those that don’t. It seems clear that sustainable investing is here to stay.
More information on Alliance Trust Investments Sustainable Future range
Alliance Trust Investments Fund centre
Position on sustainability and ethical issues
https://www.gov.uk/government/consultations/the-kay-review-of-uk-equity-markets-and-long-term-decision-making
Past performance is not a guide to future performance. Investments can go down as well as up. Investors may get back less than they originally invested.
Funds which undertake ethical screening to meet their investment aims are unable to invest in certain sectors and companies. Our exclusion of some areas of the market (on ESG grounds) may result in periods of underperformance with respect to relevant benchmarks. For instance, if tobacco stocks were enjoying extremely strong returns we would not be able to participate in their gains.
This article is for investment professionals only. It is not to be distributed to or relied upon by private investors.
Alliance Trust Investments Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC330862, registered office, 8 West Marketgait, Dundee DD1 1QN; is authorised and regulated by the Financial Conduct Authority, firm reference number 479764. Alliance Trust Investments gives no financial or investment advice.
