World on Fire

As the world faces a growing number of freak weather events and natural catastrophes, investors are increasingly taking action writes Hannah Stodell.

Raging fires in the Amazon and Australia, and widespread flooding closer to home this year have been a wake-up call for leaders around the world. These environmental disasters have also prompted some soul searching at an individual level as to what people may have done to contribute to them.

Interest in environmental, social and governance investing (ESG) and ethical investing (see What is ESG? box below) is already high thanks to factors such as the ‘Greta Thunberg effect’, David Attenborough’s Blue Planet series and global government policies to allocate more capital to sustainable investments.

Assets under management in UK ethical funds grew from £10.2 billion in April 2015 to £20 billion in July 2019 according to the Investment Association, the UK’s investment management trade body. And a 2019 survey by the Association found that in 2018, more than a quarter (26%) of the UK’s assets under management were invested using some form of socially responsible criteria.

So, could the latest global events spark an even greater interest in ESG? And in a sea of purported ‘ethical’ funds, how can retail investors ensure their money funds activities that actually benefit the planet for future generations?

What is ESG investing

A company must be managing its environmental impact by reducing carbon emissions, waste and resources such as energy. Environmental factors also include long-term impact and sustainability.

This covers areas such as diversity, inclusion, fair remuneration and impact on the local community and economy through job creation and using local suppliers. Other areas include human rights, consumer protection and the payment of tax.

This includes things like the management structure within the business, how it manages risk and executive remuneration.

Generational shift

While Australia’s recent bushfire crisis has added momentum to the ESG and ethical investment movement, a number of other fundamental drivers are at play, including a generational shift towards more conscious investment approaches, says Paris Jordan, analyst in the Socially Responsible Investing team at Sanlam.

She cites the company’s What’s Your Number? survey, undertaken in 2019, in which six out of 10 people polled said it was important their investments didn’t contravene their beliefs. Among the millennial cohort (25 – 34-yearolds), that figure rose to over 80%. “Millennials are driven by different factors. We know that the majority of money is still with grandparents and parents, but at some point, that isn’t going to be the case,” she says. “Companies that want to survive, particularly investment companies, need to think about how they will cater for, and provide products for, future generations.”

It’s not just millennials; supply and demand is driving growth in the market across generations, according to Jordan, with a greater number of ESG funds and ethical products now available. She adds: “We’ve seen the investment community evolve too, so historically where they were very focused on omission or screening out particular companies, now we have a whole host of different investment approaches to choose from.”

Adopting a range of investment approaches rather than purely screening out so-called sin stocks (from companies in the tobacco, defence and gambling space, for example) can provide better risk-adjusted outcomes, so ethics and profit needn’t be mutually exclusive, explains Philip Smeaton, Chief Investment Officer at Sanlam. “If somebody chooses not to invest in oil and gas, it’s eradicating a lot of investment opportunities,” he says. “If they say, we’ll invest in oil and gas companies, but we’ll identify the ones that have the most sustainable businesses, are investing in the right places and have a management team that is seeking out more environmentally friendly solutions, commercially developing them and making money – that can add value.”

The notion that a socially responsible investment approach means sacrificing returns has also been challenged by a mega study on the relationship between ESG and performance, published in the Journal of Sustainable Finance & Investment. It noted that the large majority of studies – about 90% – report positive findings and a positive impact on investment returns.