It’s fair to say that there has been a lot of rhetoric around sustainable investing over recent years – broadly referring to any investment approach that targets not only financial returns but also positive environmental and/or social goals and good governance. Many are however sceptical about the degree to which all the talk has been matched by concrete action.
Certainly there are a number of obstacles in the path that have deterred would-be private investors from otherwise pursuing a sustainable investment strategy; the confusion caused by the use of multiple overlapping terms such as ethical investing, impact investing, and socially responsible investing; challenges of tracking and measure the degree to which a particular investment actually achieves it’s non-financial objectives; and questions about the potential impact a sustainable investment approach might have on an investor’s overall financial returns.
However, when you look past the labels and some of the more recent marketing blurb at the actual principles that lie behind sustainable investing, many investors have been doing this for years. Historically the easiest approach was to exclude certain investments or even whole industries because of their activities were not in alignment with the investor’s values – such as tobacco companies or businesses linked to the South African apartheid regime. There were also those who sought out opportunities based on their positive impact, for example the Lever family (the family behind Unilever) were investing in companies on social grounds nearly half a century ago.
Today, the size of the sustainable investment market is growing significantly. Sustainable investing assets under management have increased 34% since 2016 to 2018 to over $30 trillion globally (Global Sustainable Investment Alliance: “2018 Global Sustainable Investment Review” (April 2, 2018)). Last year, amidst one of the worst recessions in history, sustainable investments brought in a record amount of flows (ESG Flash Survey by JP Morgan Capital Advisory Group in December 2020) and in March Hargreaves Lansdown said that the number of ethical funds that it offers has almost tripled in the past 12 months and there’s more than 11 times more money in these funds than a year ago.
So what are people actually doing differently? For many, the starting point has been to review what companies and funds they are currently invested in. This might include personal investment portfolios, stocks and shares ISAs and also workplace and personal pensions. For this reason alone you could argue that sustainable investing is having a positive impact as it is getting people to connect a lot more to what they are actually invested in. Alongside this review, and probably prompted in part by the pandemic, families have been talking about their values and what really matters most to them. This is a healthy conversation to have, particularly if you’re able to involve multiple generations.
While it can take some time to move from discussions as a family or with advisers to making some real changes, this is also happening. The next stage in the process is typically to enquire with their investment providers what sustainable investment options they have. Based on increasing demand, many like Hargreaves Lansdown have been actively increasing the range of sustainable investments they have available. Some have actually integrated some form of sustainability screening across all their investment portfolios. These approaches are mirrored by the actions being taken by investors. Many have started by adding a few new sustainable investments alongside their existing ones, perhaps as an initial step to learn more and get a better feel for them. Others have taken a more wholescale approach and implemented some form of sustainable investing strategy across their entire portfolio.
In terms of making larger investments into private businesses, we have seen an increased focus on governance when we’re helping clients to undertake their due diligence. They want to understand if the company and the directors have a code of conduct and responsible business practises. They want the board to demonstrate they are accountability, for example, do they have a tax strategy and are they transparent, accurate and reasonable in their approach.
Responsible tax is also an important component of sustainable investing. We are increasingly seeing businesses like Vodafone seeking to adopt and articulate sustainable tax principles. For wealthy individuals, the Sunday Times Tax List has created a talking point and some are now starting to consider and develop their family’s own tax principles as a result.
At the pioneering end of the sustainable investment spectrum are some more sophisticated private investors such as family offices. Here a wider range of sustainable investment solutions are being developed to try and accelerate social and environmental change. One such example is blended finance – combining money from different types of investor to ultimately unlock more funds for investments that are high in potential beneficial impact but also risk. The participation of these investors, taking more of the risk, lowers the risk/return profile of the transactions for subsequent investors that therefore broadens the potential participants. These investors do not need to take outside shareholders or clients into consideration and can therefore accept a greater risk and or certain limitations on the potential returns if this aligns with their wider objectives.
Finally, it should also be remembered that there are two sides to the sustainable investing coin. It is not just about the sorts of companies you invest in but also what you do once an investment has been made. As a shareholder you can play an ongoing role to actively engage with the business, for example by attending AGMs and exercising your voting rights. The ability to influence is most prominent in family businesses where most of not all the shares are controlled by one individual or family. If the current family decision makers are not already aware of how the business measures up from an environmental, social and governance perspective then the younger family members are putting these topics on the agenda and making sure the activities of the business are sustainable and aligned with their values.
This article was first published in the Tatler Experts’ Corner. Read the full article here.