Socially responsible investing (SRI) is a term that is appearing more and more often, but are investors still missing out on the potential offered by ethical investments?
According to figures from the Investment Association, less than £1 in every £50 invested in the UK is placed in ethical investments with a specific aim to be kind to the environment, encourage the use of green energy and deliver sustainability.
Despite growing consumer awareness of issues like plastic drinking straws, reusable carrier bags and domestic renewable energy tariffs, it can feel like this is not translating through at an institutional level.
With over 25,000 financial advisors working in the UK, only around 80 are members of the Ethical Investment Association – which perhaps suggests that it is not only investors but those who provide investment advice, who are missing out on potential profits.
Yet ethically minded investors are seeing funds outperform the rest of the market – even delivering positive returns at times when the market as a whole is falling.
This suggests that there are financial benefits to SRI in addition to the obvious social advantages that come from investing in sustainable ventures that are kind to the environment and the climate.
What are the returns on sustainable investment?
Some sustainable funds are showing strong and steady growth over a period of several years already – not bad for a niche that is still becoming more clearly defined, and a sure sign of growing consumer and investor demand for SRI-related goods and services.
One such fund is the Liontrust Sustainable Future Managed Fund, which has been on a broadly upward trajectory throughout the past decade.
In the five years to January 2020, the fund posted growth of over 70% with just a couple of short-term dips in performance that match the pattern of the wider markets.
Over the same period, the IA Mixed Investment 40-85% Shares market posted growth of around 36%, still a healthy climb but only around half that achieved by Liontrust Sustainable.
Both experienced short-lived falls in value around the end of 2018 that affected their posted full-year performance for that calendar year.
However, even taking this into account, the posted performance of Liontrust Sustainable in 2017-18 was a fall of only just over 0.5%, during a period when the IA Mixed Investment 40-85% Shares benchmark was down by more than 6%.
So it seems – appropriately enough – that sustainable investments not only deliver sustainable long-term growth but also sustain their value well during a dip.
Sustainable investments vs. the market
The Liontrust fund is not alone in outperforming the wider market. In April 2019, Good With Money published the sixth edition of their Good Investment Review, tracking the performance of ethical, sustainable and environmentally responsible funds.
In order to qualify for inclusion in the review, funds must be registered in the UK, have a clear mandate that includes ethical or sustainable commitments, or clear environmental and social governance (ESG) policies, and meet three tests:
- Do good.
- Avoid harm.
- Make money.
As of April 2019, there were 233 funds that met all the criteria to be included in the review, including 25 that were added for the first time that year.
Significantly, 12 were also removed from the review, mostly because although their investments could be argued as having positive outcomes, they did not have ESG policies in place or otherwise did not adhere to UN Sustainable Development Goals.
In its summary of the funds’ financial performance, the report states: “The performance of funds of ethically screened and sustainable funds overall continues to demonstrate that adopting a sustainable or ethical policy need not be at the expense of financial returns.”
The study found that in 2014-19, ten out of 17 UK equity funds with an ethical or sustainable mandate outperformed their sectors, rising to 15 out of 20 in 2018-19.
Over the past five years, the average ethical UK equity growth fund achieved a 33.5% increase in value, outperforming the markets by over 5%.
Among those rated three stars or above in the Good Investment Review, growth averaged just over 40%, beating the non-ethical markets by nearly 12.25%.
In the past five years, only 2016-17 saw the IA UK All Companies market perform better than the report’s Average Ethical UK Equity Growth Fund benchmark.
However, this was off the back of a falling market in the previous year, when ethical funds lost 2% of their value against the wider market’s 3.4% decline.
The new store of value?
Whatever your opinion of climate change and sustainability initiatives, there is a growing consumer demand for ethical and environmentally responsible goods and services, and that means a dual impact on market value.
Consumers are voting with their feet and moving away from multinational corporations that are perceived as harmful to the environment, for example, online retailers that have become associated with using an excess of plastic packaging.
At the same time, consumers are moving towards firms of all sizes that have clear credentials on environmental issues – and it’s becoming increasingly difficult for the big brands to get away with fudging the issue.
Customers want demonstrable commitments to sustainability and tackling climate change, including a move towards net-zero carbon emissions and 100% renewable energy wherever possible, as well as independent certification by third-party environmental groups.
For those organisations capable of delivering five-star performance on all of the various different environmental and ethical concerns, while still delivering desirable goods and services, the current climate means market growth is likely to follow.
Investors looking for a store of value in uncertain times might, therefore, find ethical investment to be the way to go. Performance over a number of years has now shown that supporting stocks with a stated aim to do good yields larger returns.
But even more crucially, during a down market, those funds have also kept more of their value, something many investors prioritise on an equal footing with growth during an upswing.
It is not unethical to make money while doing good – as the three criteria of the Good With Money review show – and we are now seeing the ethical market mature to a point where those gains are more positive, less volatile and convincingly sustainable over the long term.
How to invest in small ethical firms
Finally, ethical investors often prefer to support smaller SRI ventures, rather than put funds into multinationals who have only recently cleaned up their act or written an ESG policy that fits their existing practices.
There are funds that make it possible to focus more on smaller sustainable companies. One such example is the Triodos Pioneer Impact Fund. This has the added benefit of buying into the relatively recent trend for ‘impact investing’ – funds with a stated aim to achieve positive outcomes.
It has three primary features:
- Global impact investment.
- Support for SME ‘sustainable pioneers’.
- Collaboration with companies on sustainable outcomes.
That last point is one ethical investors might be especially interested in, as it takes the Pioneer Impact Fund from being a hands-off source of finance to be an engaged stakeholder in the companies it screens.
Investment in the fund starts from £1,000 in multiples of £500 and comes in the form of a stocks and shares ISA.
How does ethical SME investment rival large corporates?
Triodos’ own figures show that since April 2013, the Pioneer Impact Fund has outperformed the Morgan Stanley Capital International (MSCI) World Small & Mid Cap benchmark consistently, ending 2019 at an index of 220.4 vs. 208.1.
An alternative if you’re happy to invest in large listed companies instead of SMEs is the Triodos Global Equities Impact Fund, although this is trading slightly lower than its benchmark equivalent, the MSCI World fund, at an index of 199.9 vs. 213.1 since 2013.
It’s worth noting that this is still substantially positive growth – investors who bought into the Global Equities Impact Fund back in 2013 have doubled their money, while those who bought the Pioneer Impact Fund have gained over 120%.
For investors, the number of profitable options is increasing, and that means more market complexity. But it also means it’s easier to find a fund that closely aligns with your own priorities – whether that’s ethics, sustainability, energy or investing in SMEs.
Even better, as the SRI market reaches maturity, more and more funds are opening up to individual investors that offer all of the credentials listed above, supported by clear published policies and independently verified commitments, rather than vague marketing messages.
With steady and consistent upward growth across many of these funds and historical data now going back well over a decade, even the most prudent of investors have the opportunity to do their due diligence and incorporate ethical investments into a risk-averse equity growth portfolio.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.