What is driving investor interest in ethical investing?

But Sir David did not need to urge people to help clean up beaches, stop using plastic bags and dispose of their waste, for the images and intrepid filming did that for him.

Watching sea life having to navigate oceans filled with floating plastic bottles and debris, and sometimes being killed by them, plucked at most people’s consciences.

There was an urgency to the series as it showed how quickly ecosystems, such as coral reefs, are being destroyed by a very slight but crucial change in sea temperatures.

For many advisers’ clients, it may have made them think more carefully about where and how their money is invested.

Hortense Bioy, director, passive strategies and sustainability research, manager research at Morningstar, acknowledges consumer choices are changing.

The universe of sustainable investment funds in Europe continued to grow in the first half of 2018, making it easier than ever to invest for sustainability and impact.Hortense Bioy

“Consumers are moving to more sustainable products and services in every industry - and investments are no exception.

“A growing number of retail investors are looking to make a social and environmental impact,” she says.

Ms Bioy points out the European sustainable fund market alone saw net inflows of €32.1bn in the first half of 2018, up from €28.8bn in the previous six months.

She explains: “Meanwhile, the universe of sustainable investment funds in Europe continued to grow in the first half of 2018, making it easier than ever to invest for sustainability and impact.

“A total of 77 new open-ended funds and exchange traded funds (ETFs) launched from January to June, ranging from broad ESG [environmental, social and governance] strategies, to thematic strategies. Many new funds focus on climate and carbon.”

The investment industry has been grappling for decades with how to attract investors into the explicitly-labelled ethical, sustainable and impact investing products that have been launched by firms in recent years.

Sharp focus

What has changed recently?

Julia Dreblow, founder of sriServices and Fund EcoMarket, calls the BBC’s Blue Planet II series a “watershed moment”, saying “it brought the direct effects of our lifestyle choices into sharp focus”.

She also observes: “Counterintuitively perhaps, President Donald Trump may also be a factor. His views on the environment and climate change in particular are so at odds with most peoples’ opinions that he has forced many people off the fence, and to confront the reality that if we do nothing, things will get worse.

“This concern, following hot on the heels of the Paris Climate Agreement (COP 21), further underpinned the view that governments could not and would not solve problems on their own.”

It is not only coverage of climate change and environmental issues which have galvanised people to take action and seek out investment products that address these global problems.

Amanda Tovey, investment manager and head of SRI at Whitechurch Securities, cites greater news coverage of social issues, including the lack of affordable housing, for having sparked a growing interest in socially responsible investing (SRI).

“Many people have started to think more about how they spend their money and the products they buy - how are they sourced/produced? Is it bad for the environment? Is there a social cost?” she says.

“This has, in turn, led them to question where their money is invested and look to align their investment choices with their lifestyle choices.”

The investment industry has also been working hard to bust some of the myths about sustainable and ESG investing which many believe has prevented these types of funds from entering the mainstream in the past. One of these is the belief that investors would have to sacrifice returns if they wanted to invest with an ethical conscience.

John David, head of investments at Rathbone Greenbank Investments, explains there is a combination of factors driving investor interest in ethical investing but that a key one is “there’s increasing evidence that investing ethically does not have a negative impact on performance, indeed, it might even contribute positively to it”.

He goes on: “For many years, the perception that there is a price to pay for taking social, environmental or ethical factors into account has dissuaded many from investing in this way, and also limited the number of advisers and discretionary fund managers (DFMs) promoting the area.

“But this change in perception, added to a growing awareness that there is a need for a more socially and environmentally sustainable economic system (plastics being a case in point) has helped drive growth.”

Shareholder influence

But Jason Hollands, managing director of business development and communications at Tilney Group, is a little more sceptical, citing Investment Association figures which show ethical funds stand at £16.7bn in funds under management at the end of July, which represents a “tiny 1.3 per cent share of the overall [investment] universe”.

He says while ethical consumerism has been on the rise, the trend is not mirrored in the investment world, despite the best endeavours of advocates to raise awareness of ethically and environmentally screened funds.

“Does that mean investors don’t care about issues like the damage being done to our oceans by plastic waste or climate change?” he asks.

“No, I don’t think so, because outside of the narrow realm of ethical and environmental funds the wider investment industry has become much more focused on the assessment of environmental, social and governance risks into their core investment processes, and are prepared to use shareholder influence to engage with companies on these matters.”

Mr Hollands notes: “You don’t have to be managing an ethical fund to recognise that a company which is sloppy in managing its environmental or societal impacts is one which risks shareholder value through potential reputational damage, customer desertion, fines and legal penalties, and potential loss of access to government contracts.”

There is often an assumption that these types of funds appeal more to millennials than other demographic groups. Millennials, those born between the early 1980s and early 1990s, are often said to be the driving force behind the increasing number of ethical and sustainable mandates launched by fund groups.

Research by Triodos Bank among 2,020 UK adults appears to back this up. It reveals in its latest Annual Impact Investing survey that 19 per cent of UK investors are planning to invest in an SRI fund in the coming years, rising to 47 per cent of investors aged 18 to 34.

It also points to millennials as being behind a trend it calls “resist investing”, with 30 per cent of investors motivated to invest in an ethical fund because of events in the news, climbing to 56 per cent of investors in the 18 to 34 age group.

More than millennials

Christopher Greenwald, head of sustainable investment research and stewardship at UBS Asset Management, says he definitely sees particular interest in sustainable investment from millennials.

But others believe this generation cannot take all the credit. 

Mr David points to a shift across a much wider group of investors, both by age and type; from charities, private clients, pension funds and financial advisers.

“While there are suggestions that millennials are more interested in SRI investing, we are seeing interest in the area from a range of demographic groups,” notes Ms Tovey.

She adds: “More advisers are talking to their clients about their choices in this area when making investment decisions, which is driving demand.”

However, Brian Dennehy, managing director of FundExpert.co.uk and Dennehy Weller & Co, has observed no interest at all from his clients.

“We have no demand from our client base, either advised clients of Dennehy Weller & Co, or the DIY investors of FundExpert.

“As the millennials get older and have more serious money to invest, they will naturally focus on the more serious investment theme of maximising profits,” he predicts.

But while Ms Dreblow supports research that points to millennials being more interested in this area than older generations, she is careful not to pigeonhole investors.

“It has been recognised that women are more interested in this area than men for some decades,” she explains. 

“I have regularly heard stories from advisers who have talked about sitting down to discuss investment with married couples, only to encounter domestic disharmony resulting from a wife being more interested than her husband,” she recalls.

“There are a number of areas that worry me about this line of thought, however. In part, because generalisations can be misleading”, she cautions, “but also because it implies that older people, men in particular, remain disinterested in this area when, in fact, opinions across the board are clearly shifting.”

eleanor.duncan@ft.com