To ‘trend’ has taken on new meaning in the age of social media but the idea of something coming ‘back into fashion’ is nothing new. We are often not aware that trends perceived as ‘new’ today might be much older than we think.
When the English Quakers Samuel Tuke and Joseph Rowntree began an insurance and savings mutual, Friends Provident, in 1832, it was to a set of core values that reflect a much more recent investment trend – that of sustainable investment.
Fast forward to 1984 and Friends Provident is again at the forefront of a new cycle following the launch of a strongly principled ‘stewardship’ fund.
While they may have raised just £760,000 at launch, the trend has shown staggering growth since, and the United Nations now counts more than 1,900 signatories and $70tn in assets under management to its principles for responsible investment globally.
Today, the frontline of sustainable investment is broad. It ranges from socially aware millennials on social networks challenging the way businesses behave, to baby boomers worried about the world they are leaving behind and challenging the way politicians behave. It is these preferences that are changing how we invest. Some wealth managers have been slow to react, stating: “there is not much client interest in this” or “sustainable investing reduces diversification and investment returns”.
Both those views are becoming harder to stand by, however, as flows into sustainable investment continue to gather pace and the body of research showing that sustainable factors can positively influence investment performance grows. But even for an investment professional, the initiation into sustainable investment can be daunting.
There is a wide array of topics currently raised for discussion and almost all are subjective. The clients of wealth managers have varied values and the main challenge the industry is facing is how to pool them all together.
- Socially responsible investing is a rapidly growing trend in investment
- It is helpful to think in terms of norms-based and values-based investing
- Negative screening remains the most significant style of sustainable investment.
This article aims to set out a top level guide to navigating the jargon and explore some of the leading trends in sustainable investment at the moment.
Breaking down the jargon
Sit down in a weekly team meeting in any industry and, as a novice, you will soon get lost in the jargon. Somewhat unhelpfully, it appears that if outsiders were to join a sustainable investment meeting the jargon is still in the process of being ironed out.
However, at a top level, it can be helpful to think in terms of ‘norms-based’ and ‘values-based’ investing.
Norms-based investing is centred on commonly accepted social values that set out a minimum standard for investment in financial assets.
The term responsible investing is often used to describe investment of this type (and is becoming a minimum standard for professional investors). Often these standards are set out by international organisations like the UN or at national level.
For example, the Netherlands amended its market abuse decree in 2013 to prohibit investment in companies partaking in the manufacture of cluster munitions. Other common characteristics of responsible investing include stewardship or shareholder engagement, where portfolio managers vote on company resolutions and meet with management to discuss concerns.