Ethical investments still on trend

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Ethical investments still on trend

Good Money Week might be over, but the drums of ethical investing continue to bang loudly.

 

Last month, fashion giant Gucci made known its intention to stop selling fur by 2018 – committing to a sustainable fur-free future.The company is owned by publicly traded company Kering, which featured in the 2016 Global 100 Index, which ranks the world’s most sustainable corporations.

Gucci’s resolution is just one example in a line of many, showing the rising popularity of companies wanting to show they care about environmental, societal and governmental (ESG) issues as much as they care about making money. This trend is big in mainland Europe and America.

 

Sustainable investing

However, in the UK the take-up of sustainable investment strategies has been slower than anticipated, according to fund manager Liontrust.

This is despite the UK being a leader in developing sustainable investment as a service and an industry.

As a concept, sustainable investing generally refers to buying stocks and bonds, but carefully selecting companies that match a criteria based on their impact on stakeholders, or de-selecting companies that contravene this. It can, however, be defined in different ways by different people and encompasses more esoteric areas such as ESG, ethical and impact investing.

Peter Michaelis, who leads the Liontrust sustainable investment team, said: “In the UK we have seen it grow more slowly than we would have anticipated, particularly when compared to regions like [mainland] Europe, where we have seen really rapid growth and the take-up of sustainable strategies by institutions and pension funds.

“In the past few years we have seen a rapid increase in the US, where the ideas behind sustainable investing has gained traction and there is big growth there. The UK has been a leader in developing sustainable investments as a service and an industry. The growth has been positive and every year it has grown, but it has not taken off to the same extent.”

Key points

  • The UK is a leader in developing sustainable investment.
  •  CFA is reviewing ESG content in course curriculum.
  •  The challenge for investors is how to decipher whether a fund truly incorporates an ESG strategy.

Investors are often hesitant towards sustainable investing owing to concerns about performance. Many believe returns have to be sacrificed.

Mr Michaelis added: “There is a perception among many people, particularly financial advisers, that sustainable or ethical investments do not give you enhanced investment returns. But that will change the more it is demonstrated through performance.”

Mr Michaelis’s team compares its funds with peer groups or mainstream benchmarks. Its £681m multi-asset Sustainable Future Managed fund sits in the IA Mixed Investment 40-85% Shares sector, and is first quartile over all time periods. On a five-year view, the fund has returned 80 per cent versus a 54 per cent sector average, according to FE Analytics.

“There’s a growing amount of evidence from fund performance that sustainable funds do deliver superior investment returns, and it is not just in equities. Our corporate bond fund has performed over a 10-year period,” Mr Michaelis said.

“Over a long-term period, sustainable investors have not seen worse returns than the average funds.”

The sustainable funds were launched in 2001, when the team were part of Alliance Trust Investments and had accumulated close to £3bn in assets before they were soldto Liontrust earlier this year, with chief executive John Ions banking on the area being one with strong growth potential.

The strategies under Mr Michaelis’s purview are underpinned by two methods. 

The first method is that they embed long-term trends into the analysis. These would be themes around healthy eating, energy efficiency changes, technology, innovation in healthcare and cyber security. Mr Michaelis said often the market tends to under-appreciate companies exposed to these structural trends.

The second is that they look in detail at how companies operate.

Mr Michaelis added: “We don’t just review the common financial factors everyone looks at. We look more broadly at ESG factors, which gives us a better picture of the quality of management. Those are the extra bits of analysis we build into our approach, which give an information advantage.”

 

ESG

Hermes research shows that the quality of corporate governance within businesses is linked with better risk management, company performance and higher investment returns over a long period. As a result, better-governed firms consistently outperform their poorly governed peers.

Despite some having a perception about the performance of sustainable funds, there is a growing awareness among advisers.

The challenge is how to decipher whether ornot a fund truly incorporates an ESG strategy, beyond just checking the holdings within the fund. To help IFAs in this analysis, a number of ratings firms, such as Morningstar, have launched their own sustainable ratings on funds.

Kate Hewitt, co-owner Castlefield Investment Partners, said: “There is increased recognition among fund managers of the demand for ESG criteria to be included in the investment process. However, we’ve found that the ability to utilise ESG research effectively varies dramatically between funds.

“There is a sense that some providers want to tap into the trend without really altering their investment process to incorporate ESG factors.”

 Mr Michaelis said advisers should have a checklist.

He added: “It is not enough to stick “ethical” in the title. It is about an investment strategy. My checklist would be: what are the resources you have devoted to it, do they run other strategies or is this the only strategy they run? And can I see a list of the holdings?

“It should become apparent there and then what the recent transactions that have taken place as a result of ESG factors  or sustainability analysis are.”

Another indication of the expected pace of the future growth of ethical investmentsis the interest that the Chartered Financial Analyst (CFA) society is also taking in it. The institute is conductinga  review of its curriculum to see if it should increase the level content devoted to the topic.

Demand for ethical investing is also expected to come from foundations and institutions,  Mr Michaelis added. In early 2005, the then UN Secretary-General, Kofi Annan, invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI).

As of August 2017, more than 1,750 signatories from over 50 countries, representing around US$70trn (£53trn), have signed up to the PRI.

Ima Jackson-Obot is a features writer at Financial Adviser