It’s ok for the ethicists to argue that investing ethically is a “good thing”, they can argue that it can change the world, make the city behave and bring joy to every sandal wearing, woolly jumper wearing tree hugger in the country but unless they can show that it works financially then its frankly a niche market that will stay niche for all time.
It is true that the surge in the capital invested ethically, from £2.4 billion in 1999 to over £9.5 billion now has to be some sort of indication of quality (even if would seem that the growth on the new lighter green funds have played a major part in this growth). But what about performance?
As with any investment funds it is possible to use statistics to prove any point of view. However it is undeniable that some ethical funds perform well. Friends Provident and Henderson equity income funds beat the average. Aegon and Seven Investment Management cautious managed funds are there in the top half; in fact Aegon is CityWire’s current top fund.
In global investments Henderson, Ecclesiastical, Aberdeen and Aviva have all out performed the average. Even in Asia firms like First State nearly double the average performance.
But there are of course losers. This is a specialized area of investment and as such one need the advice of a specialist independent financial advisor.
But to be taken seriously the ethical investment world has to offer a significant sector spread, traditionally ethical funds have majored on UK small cap and corporate bond funds but over the last few years there has been widening of the choice of sector most significantly onto emerging markets. Well over one hundred ethical funds offering a choice of UK Large and Small Cap, UK All Equity income and Growth, European, Global Growth and developing markets the average investor is spoiled for choice
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Perhaps more interestingly is the development of investment opportunities outside of equities and bonds. Cochabamba offer an opportunity to invest in farming in South America, others offer investment in forestry and directly into wind farms. Many of these funds are high risk and need careful advice before investment.
Ethical Investors have long been concerned with certain issues that have been seen as left field which are now becoming areas of concern that aren’t “ethical” but are now simply about the survival of our species.
Climate change has the potential to seriously impact shareholder value and will affect businesses across every sector of the economy, especially in the medium to long term and has been a concern for ethical investors for many years. Europe’s leading companies have seemed slow to respond to the pressure on this issue. Latest research from EIRIS (Ethical Investment Research and Information Service) shows that leading European companies representing €1.2 trillion by market capitalization are failing to address the various climate change risks they are exposed to. One recent speaker told of a bank offering a twenty five year mortgage on a cliff top house in an area of coastal erosion.
The growing interest in this area has brought a growth in funds that specifically invest in this area. Schroder and Impax are particularly interesting in this area, both outperforming the average.
Biodiversity is another. At a recent convention environmental ministers committed to cut the loss of forests and habitats by a half. They also took decision about nature reserves and areas of coastal erosion.
Obviously all companies (all humans) are dependent on a healthy ecosystem. Again the UN has estimated the annual cost of biodiversity loss at between USD 2 - 4.5 Trillion, nearly 7.5% of global GDP.
But are our leading companies taking any notice of this the “COP Out report” (http://www.eiris.org/files/research%20publications/Biodiversity2010.pdf ) says that over a thousand of the one thousand eight hundred FTSE listed companies have a significant impact on biodiversity and only seven of these high impact companies have a sensible policy for bio diversity.
Chemicals & pharmaceuticals, construction, property development and road distribution & shipping sectors are doing the least to tackle biodiversity. The forestry and paper sector displays the best
The same report said that very few companies link biodiversity to other key issues such as climate change, air and water emissions, water use and waste. Ethical investment has led the way in putting these issues onto the agenda for business thinking.
Ethical Investors have long known that environmental reporting is a first step to bringing what was seen as these ethical issues and is now increasingly becoming seen as survival issues.
Directly the pressure from the ethical investment world has brought a growth of “green” reporting. The UN produced the Principles of Investing and over 800 asset owner, investment managers, and professional service partners have agreed to complete detailed reports each year explaining their progress on engagement, integration and disclosure. Nearly half of these reports are now public, progress for the less than a quarter a short while ago. (see http://www.unpri.org/signatories/#ao for more)
In the UK the Financial Reporting Council's Stewardship Code will require asset owners and asset managers to report on their adherence to these new and important principles. There are similar proposals in South Africa - doubtless other regions will follow. Amongst retail fund managers EuroSIF has promoted its SRI Retail Fund Transparency Guidelines for a number of years and is now seeking to boost these through an independent auditing process.
The tide towards transparency is worldwide.
As this tide continues to rise, it is worth asking what is the point of responsible investment reporting by investors and what can it achieve.
Experience of tells us a number of things:
- Reporting publicly can lead to those working within in an organisation taking ESG issues more seriously
- This in turn creates opportunities to raise the profile of ESG, leading to more resources and greater support from senior management
- Common reporting obligations are enormously useful for those who need to compare asset managers or asset owners to understand skills and capabilities in responsible investment
Good reporting should provide firm evidence that an organisation is taking responsible investment seriously. But we also know that bad reporting conveys very little and is nothing better than a box ticking exercise. Plus, there's the added danger that more time is spent on reporting on an organisation's responsible investment activities than is actually spent on carrying out and developing those functions.
(Source EIRIS)
Led by the charities and large pension funds sustainability and ethics in business and investment are a growing force. Recent events in our financial system has shown that unless this pressure is allowed to move more deeply into the fabric of the city then we can expect to see more and more crisis. The city has to recover the trust that has been lost in recent years.
Steve Cummins, Chief Executive of TheCityUK, speaking at the UKSIF annual lecture said,
“In presenting the case for maintaining the UK's role as a key centre for sustainable and responsible finance, (it is true) that once you have lost public trust and confidence you cannot recover or restore the same trust and confidence. Instead you have to find a new basis on which to gain fresh trust and confidence.
(this) means that the path to the rehabilitation of the finance sector needs to be a new one. One, perhaps, in which financial firms position themselves as the eyes and ears of investors looking for, and dealing with, forthcoming problems in the marketplace: protecting the interests of all rather than simply seeking to avoid disaster themselves (with mixed success) and trying to stay one step ahead of the regulators.
That would mean seriously addressing issues like climate change and biodiversity and ways in which globalisation could fail to benefit everyone, each of which themes contain the seeds of mass value destruction for the world's investors if not properly addressed.”
So where ethical investment has been leading, climate change, biodiversity, transparency, it seems that the city is beginning to follow. Far too slowly maybe, far too held in the old ways certainly but like the dam that has a small leak one can see a time when the banks, the investment firms, and the independent financial advisors, start to work for you and me not their own self interest. After all a well performing ethical fund might even produce the same level of bonus and would we begrudge it so much if we knew they were working for the earth, its ecosystem and for us?
