How ESG strategies can help boost income

According to the Schroders Global Investor Study 2017, which surveyed more than 22,000 investors across 30 countries, more than three quarters (78 per cent) of respondents report that sustainable investing is more of a priority for them than previously.

Also, almost two thirds of those surveyed said that they had upped their sustainable investments, in comparison with five years ago. While millennials were found to be most in favour of investing in sustainable investment funds, a third of the baby-boomer generation is keen too. 

This is reflected in the increasing volume of sales of ethical funds. Net retail sales of ethical funds were a considerable £151m in December 2017, according to the Investment Association (IA).

Referring to 2017 as a whole in the IA’s monthly statistics of UK investor behaviour, Chris Cummings, chief executive of the IA, says: “Notably, more than £1bn of net retail money flowed into ethical funds, the highest annual inflow into this type of fund.” 

While sustainable investing is undoubtedly on the rise, the question is whether ESG strategies are delivering opportunity for income seekers, as well as providing the chance to invest ethically.

Ethical dilemmas

Achieving the combination of investing ethically and simultaneously gaining exposure to income generating stocks presents some challenges, but some of these are common to all investors.

John David, investment director for Rathbone Greenbank, explains: “Generating income has been a challenge for all investors during this extended period of low interest rates, and ethical investors have faced similar issues to those of the wider investment community.”

Assessing how a company manages ESG gives you an insight into the quality of the management team. Mike Appleby

However, ethical investors have also faced additional problems, specific to the sector, in the process of  seeking income in the ESG space. 

The level of strictness applied to choice of investment can limit opportunity, as Mr David points out: “The nature of any ethical screen is that it tends to reduce the universe of potential investments, so arguably the options to find UK income producing stocks are more limited than those available to a ‘traditional’ investor.”

Ryan Smith, head of ESG research at Kames Capital agrees that screening can limit income, as he says: “If you apply traditional exclusions, you won’t have as much exposure to income-generating stocks.”

And the stricter your ethical choices and the more sectors are screened out, the more your options and income opportunity can shrink.