The Big Exchange debates the question whether companies that aim to ‘do good’, do in fact make for a good investment.
The Big Exchange debates the question whether companies that aim to ‘do good’, can also present a good investment.
Investing in line with your principles is not new; the first ethical funds were launched in the UK in the mid-1980s for people who wanted to avoid activities considered harmful to society. So called vices like gambling and alcohol were excluded whilst companies demonstrating positive practices, such as good working conditions, were favoured.
The rationale for such businesses also delivering decent returns was that responsible behaviour would attract more loyal customers and employees (brands such as Cadbury’s, M&S and Unilever thrived in part due to their paternalistic cultures).
A few years later saw the arrival of specialist environmental funds, led by Jupiter Ecology in 1988, hoping to participate in the early days of the green revolution. Both approaches attracted a steady stream of investors, but it wasn’t until more recently that interest in putting your money to work for the good of people and planet has really started to gather momentum.
High profile campaigners like Sir David Attenborough and Greta Thunberg have certainly raised awareness of climate change and other environmental challenges. As a result, more of us are realising that how we live our lives and invest our money can make a difference. What’s more, we don’t necessarily have to choose between ‘principles or profits.’
Today we often hear ‘sustainable investing’ used as the umbrella term for a range of strategies. Whilst many fund managers would say they adopt a responsible approach, meaning they take account of ESG (Environmental, Social & Governance) issues that might reduce financial returns, sustainable investors typically also seek ESG opportunities in industries and companies that are set to benefit from the shift to a sustainable future.
Impact funds go a step further and focus on solutions to the world’s sustainability challenges which have a measurable positive impact alongside aiming for competitive financial returns. The Big Exchange offers several of these including ones from Baillie Gifford, Regnan, Federated Hermes, WHEB, UBAM, T.Rowe Price, and Triodos.
Sustainable investing is no longer a niche area, and it is now possible to build a diversified portfolio across geographies and asset classes. In addition to equity funds, there are others offering exposure to, for example, bonds, infrastructure or property. Investors can opt for an ‘all in one multi-asset’ fund or even a thematic fund if interested in a specific industry, for example timber, water or clean energy.
As the number of funds has grown to meet demand, so too has the investment universe. The opportunity set for companies is constantly evolving too as technology advances. Wind and solar energy were still at the developmental stage when the first environmental funds were launched but is now fast replacing fossil fuels for power generation.
Current innovations include energy storage solutions to tackle the intermittency problem (when the sun doesn’t shine, or the wind doesn’t blow!) and ‘green’ hydrogen (generated using renewable electricity) to de-carbonise heavy polluting industries such as cement or shipping.
Companies driving positive change can be found in a wide range of industries, with products and services encompassing clean energy, electrification of transport, healthy and sustainable food, lifesaving drugs, healthcare for a better quality of life, and improved access to education and financial services.
Emerging megatrends include the more widespread adoption of a circular economy business model. This involves recycling and reuse of raw materials and goods which can reduce the need to keep extracting finite natural resources.
Biodiversity is another area garnering attention; we need to make good the damage mankind has done. Industries that are playing a part in biodiversity restoration include precision agriculture and alternative proteins (such as plant-based foods).
Technology is key to the development of industries that didn’t exist a few years ago. Many tech companies are enablers of the innovative products helping to advance progress towards the SDGs (Sustainable Development Goals). For example, semi-conductors are critical components in a huge number of applications from communications to healthcare and transport.
The pandemic highlighted inequalities in society and the need to ‘do the right thing’. This involves businesses considering the social needs of all parties affected by their activities and supporting them by way of high employee welfare standards, product quality and safety, efficient use of natural resources, and support for local communities.
The race to find an effective vaccine against Covid was an example of what can be achieved when corporate and government bodies work together (in this case by providing expertise and fast track approval respectively). Short-term costs can bring long-term benefits in terms of customer and brand loyalty, attracting and retaining staff, and raising capital for future development. All of which could translate into higher profits and shareholder returns.
Most sustainable funds will exclude (or set clearly defined revenue thresholds for) ‘the bad stuff’, meaning harmful activities such as fossil fuel extraction, tobacco and military weapons whilst also avoiding companies with high carbon footprints and poor scores for water and energy consumption. Examples of funds with an emphasis on ‘social’ or ‘people’ factors include CT UK Social Bond Fund and abrdn UK Ethical Equity Fund.
Government support for decarbonisation (as well as consumer demand) has resulted in the availability of clean, cost-competitive renewable energy and a big increase in market share for electric vehicles. Meanwhile, companies on the wrong side of regulations are likely to face fines and reputational damage.
Furthermore, climate policies and regulations to limit the use of fossil fuels, such as carbon pricing mechanisms, emissions standards, or outright bans on certain types of fossil fuel extraction, can render new exploration and production projects unviable.
Although there are no guarantees, the trends we are seeing look promising for longer-term investment returns. Clearly there will be bumps in the road to net zero. Indeed, 2022 proved a difficult year when war in Ukraine (and subsequent sanctions on Russian oil and gas) plunged much of the developed world into an energy crisis. Nevertheless, such events do highlight the need for energy security. A more recent setback has been President Trump’s backtracking on Biden’s Inflation Reduction Act which included new spending and tax breaks to boost clean energy.
This all serves as a reminder that, with its focus is on growth, sustainable investing should be embraced for the longer term and is not the way to make a fast buck. Indeed, it is important to combine traditional financial analysis with a holistic view of a company. Ticking the green/social boxes alone will not necessarily produce positive financial returns. That said, we believe that companies addressing environmental and social challenges should experience growing demand for their products and services which may lead to bigger profits and returns for shareholders.
So, in our opinion doing good doesn’t mean sacrificing returns when you invest for people and planet. Of course, all investing carries risks and there will be winners and losers in every field, but active fund managers apply their skills to try and find those long-term winners. Another way sustainable strategies aim to add value is by engaging with companies and pushing them to improve their operating performance.
To help consumers find the products that match their needs (and clamp down on greenwashing) the FCA (Financial Conduct Authority) has introduced Sustainable Disclosure Requirements (SDR), which allow funds to adopt labels which relate to their suitability objectives and strategy. Please note these are only available to UK domiciled funds.
If you have more questions about investing, you can visit The Big Exchange website and download one of our free guides or send us a message to see if we can help direct you to the answers you need.
Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.
This communication does not constitute investment advice. If you are unsure whether an investment is suitable for your circumstances, you should contact an independent financial advisor.
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