Sustainable and responsible investing (SRI) has developed materially since the ethically motivated boycotts of apartheid and the application of religiously motivated screening.
Initially, SRI’s purpose was to avoid certain sectors – arms and tobacco – but it has increasingly evolved to help support companies that ‘do good’, and also to generate investment outperformance.
SRI allows investors to align their values with their investments, such as by investing in firms that improve quality of life, be it through advancement in medicine, technology or education.
Investors no longer need to choose between performance and SRI. There is an increasing amount of companies (equity and bond) that are well positioned to add value for shareholders. Many fund houses now have an ethical proposition within their armoury, seeking to identify robust businesses with attractive valuations, while also building a more stable, resilient and prosperous economy.
In view of this, Liontrust has recently spent £30m acquiring the £2.3bn sustainable investment team from Alliance Trust, claiming at the time “interest in and demand for sustainable investment will only continue to grow as consumers increasingly expect the companies they use to be socially responsible”.
As highlighted by SRI-Connect, which links investors with sustainable companies, the SRI market has grown considerably over the past decade and the pace of growth is arguably faster than for any other strategy.
Sustainable investing accounts for 18 per cent of assets in the wealth and asset management spaces, according to a recent note from EY. The growth of this sector, and areas such as environmental, social and governance investing, is aided by the preferences of millennials.
EY added that 15 per cent of millennials said they would rather purchase products from a sustainable brand, compared with 7 per cent of non-millennial investors.
The ‘stickiness’ of money has also ensured that during both the 1999-00 and 2008-09 crashes, SRI funds didn’t witness the same level of pillaging experienced by other strategies – perhaps contradicting the belief that SRI is a luxury for the good times only.
The perception has been that SRI will underperform more conventional strategies, yet there is little evidence to support this. Outperforming the market is as important to an SRI fund manager as it is a non-SRI manager.
A report by consultancy Mercer reviewed 20 academic studies that examined the performance of SRI funds relative to their more conventional peers, and categorised their findings into three categories: whether the sustainability effect had a positive, neutral or negative effect.
The findings showed 10 had a positive effect, seven neutral and just three negative. This is consistent with other studies suggesting SRI is either a positive or neutral influence over performance.
From a performance perspective, an allocation to SRI strategies needs not be seen as any different to the rest of a portfolio. It could be measured against conventional benchmarks and relative to conventional peers, and any under or outperformance may be nothing to do with the ethical bias it carries.