“Does Ethical Investing mean lower returns?”
Ethical investing has become increasingly popular over the last few years, as investors have tried to align their investment strategies with their personal views.
This short blog will help you to understand:
“What is ethical investing?”
“How have ethical investments performed recently?”
“What are the problems with ethical investing?”
“Is ethical investing right for me?”
What is Ethical Investing?
Ethical investing is a broad term that covers a range of different investment choices, but a good general definition is that it’s the investment of money into companies that seek to affect positive change in the eyes of the investor.
For personal investors, this is typically through larger funds that pick and choose ethical companies based on a set of criteria, usually called “themes”.
What does ESG stand for?
While there are a huge range of themes that determine whether a company can be considered ethical, there are three larger categories that are predominantly used:
Environmental – Also known as ‘green’ investing, this involves investing in companies that aim to tackle climate change, whether that’s producing solar panels as an alternative source of energy, trying to reduce pollution, or solving water-related issues such as usage and disposal.
Social – Social investing covers anything where the behaviour of the company is considered socially responsible, such as efforts to remove child labour and human rights violations from their supply chains. Socially responsible investing can also involve excluding “sin stocks”, such as tobacco production or gambling.
Governance – This involves the way in which the companies are run at executive level and can include anything from executive pay and board diversity to corporate transparency and efforts to combat bribery or corruption.
The terms “environmental”, “social” and “governance” are often grouped together into the acronym “ESG investing”, another blanket term for ethical investing.
However, despite all the conversation around ethical investments, there’s still a perception that ethical investments don’t perform as well as the rest of the market and provide lower returns than “traditional” fund options.
So, how true is this?
Ethical investments achieved strong growth in 2020
2020 will be remembered for many reasons but, as Citywire have suggested, it will no doubt stick in the mind of investment professionals as “the year investing based on environmental, social and governance (ESG) criteria went mainstream.”
The figures support this as, according to The Investment Association, net retail sales of responsible investment funds reached £7.1 billion between January and November 2020.
These impressive figures were matched by an increase in returns, too. According to a study from Moneyfacts, the average ethical fund saw 4.3% growth from July 2019 to July 2020, compared to an average 1.5% loss for more traditional choices.
Ethical investments also appear to have been remarkably resistant to the impacts of the coronavirus pandemic, weathering the initial sell-off during the March lockdown and bouncing back even stronger.
Results that are years in the making
Remarkably, these numbers are somewhat underwhelming when considered against the overall growth of ethical funds on a global scale in the past ten years.
Research from Morningstar compared 745 sustainable funds against 4,150 traditional funds and found that ethical funds achieved average returns of 6.9%, while their traditional counterparts’ average was slightly behind on 6.3%. This outperformance was in all categories, both in the UK and abroad.
To some analysts, these results are unsurprising. “The momentum behind responsible investing has been steadily building for some time,” said Richard Eagling, head of pensions and investments at Moneyfacts.
“There is a sense that a raft of new initiatives, changing regulation and some truly impressive sustainable fund performances could prove a catalyst for further growth.
“The argument that investing responsibly must mean a trade-off between value and values or profits and principles has been increasingly debunked in recent years.”
Ethical investing may not always be as ethical as you think
Regrettably, in some cases investing in ethical funds doesn’t necessarily mean you aren’t supporting unethical behaviour.
Online fashion retailer Boohoo was previously considered as an ethical investment, appearing in ethical funds for its supposed strong governance and employment opportunities. However, an investigation from the Sunday Times found a factory in Leicester, which was producing clothes to be sold by Boohoo, had been paying workers just £3.50 an hour, less than half the UK adult minimum wage, and had been ignoring Covid-19 safety protocols in the workplace.
Boohoo was dropped by some ethical fund managers when this behaviour was revealed, but it’s an important lesson: just because a company appears in an ethical fund, it doesn’t mean they’re always as socially conscious as you might hope.
Ethical funds are no longer a backseat investment choice – but can they keep growing?
There can be no doubt that ethical investments are experiencing a period of great popularity and enthusiasm from investors.
Research from Citywire shows that, between 2003 and September 2020, there’s been a 1,300% increase in sustainable UK assets under management from £2.9 billion to a remarkable £40 billion.
As with any investment, it’s a fool’s errand to presume that past performance of any fund can tell us anything about how it might perform in the future. But, with ethical conundrums such as climate change at the forefront of business concerns, there’s certainly space for continued growth in what is still relatively new ground.
Get in touch
If you’d like to discuss how ethical investing could make a positive impact to your portfolio, please get in touch. As a financial planner in Bath, I can help you with advice personalised for your specific circumstances. Email daniel@wiltshirewealth.com or call 01225 699790.
Please note
The value of your investment (and any income derived from it) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
