The world’s population is expected to reach a staggering 9.7 billion by 2050.
The damage that 7 billion people have been able to inflict on the planet is evident in the effects of climate change, deforestation, number of extinct living organisms and depletion of natural resources and these screeching alarm bells are evidence that we cannot leave this ticking time bomb for our ever increasing number of descendants to face.
We have an obligation to the world, our families and ourselves to start making some radical changes now. And what speaks louder than words and packs a bigger punch than protests and petitions – money does.
We can make a difference by choosing to direct our money towards building a better world, and we can do this through leveraging our money’s power by investing in line with our values.
The good news is that it is possible to also make a profit by using our money in this way, thereby increasing our money’s power and making this a sustainable endeavour.
What is ESG and SRI
ESG and SRI seem to be the buzzwords and trends of the moment but have in fact been gaining momentum over the last 10 years as more investors want to know where their money is going and what it’s being used for.
In fact the Global Sustainable Investment Alliance reported that at the start of 2018 there were $30.7 trillion of sustainable assets in the 5 major world markets. And these are the kind of numbers that can drive meaningful changes.
ESG and SRI however are less than meaningful acronyms and don’t provide much guidance as to what is inside the box of this type of investing so let’s take a closer look at this.
E for Environmental
This consider whether a company is positively or negatively impacting the earth and is typically evident in their policies to climate change issues, air and water pollution, water scarcity, waste management and energy efficiency.
S for Social
The people aspect. How the company treats its employees, customers, consumers and suppliers. Important aspects to consider here are the company’s diversity and inclusion policies, their ethical supply chain sourcing and their policies on social issues.
G for governance
The company directors’ approach to their shareholders, employees, customers and other stakeholders.
Investors will want to see an alignment of management’s incentives to the business success not only financially but also in terms of meeting their values. This would cover executive compensation, incentives tied to their stated ethical, environmental and social values, diversity of board and employees, their history in reporting to shareholders and evidence of their commitment to their environmental, social and governance objectives.
Socially Responsible Investing (SRI) is a branch of ESG investing and is generally based on excluding so called “sin companies” from the ESG investing group in terms of particular criteria. Tobacco, alcohol and weapons are examples of these companies but others may be screened out for employee treatment, use of fossil fuels or failure in corporate governance.
As an investor, look out for the company’s sustainability reports which should be prepared in accordance with recognised reporting standards such as the Global Reporting Initiative (GRI) and Principles for Responsible Investment (PRI).
How does ethical investing create social responsibility?
“The reward for work well done is the opportunity to do more” and this is never more true than a company effectively implementing sustainable practices. This not only gets them a wider range of investors, especially relevant when you consider the number of investors that are considering sustainable practises the leading criteria for investment, but has also been shown to provide other significant benefits such as:
Reduction of company risk:
Climate change and resource scarcity are global issues but on a company level pose risk to a company’s profitability and longevity as well.
A large US power company was recently forced to declare bankruptcy after it was found liable for contributing to wildfires considered to have been caused by the effect of climate change.
Boost company profitability
A happy workforce is a productive one. Studies by Gallup have shown that a strong, loyal workforce built on trust, fair treatment and support is able to grow earnings per share 4x higher than less satisfied rivals.
In addition research by McKinsey has shown that a diverse workforce contributes to above average earnings, innovation and performance.
Sounds like a win-win situation all round.
How can ethical investing benefit you, the Investor?
It makes you feel good
An ethical investor has greater autonomy in directing her money to where she wants it to go and can feel more comfortable that she is using it in a manner consistent with her values.
Ethical companies outperform their industry peers financially
Companies with strong governance oversight outperform their poorly governed competitors when ESG is an intergral part of their performance targets.
Those that prioritise ESG generate superior long term financial performance metrics including increased revenue, return on equity and return on investment. This is a compounding positive as the more sustainably focused they are, the better the talent they attract, the greater the ability to build a loyal customer base and thereby mitigate risks to their future existence while also driving increased profitability.
While this is not a prediction for future performance, ethical investment indices have outperformed their none ethical counterparts over the last 10 years largely due to the poor performance of oil, mining and tobacco stocks. Research produced by Wills Owen, one of the largest DIY investment platforms in the market, shows the FTSE4Good UK Index returned 125% over 10 years versus 118% for the FTSE All Share Index. The gap in the US was even more significant with the FTSE 4 Good returning 373% versus the S&P 500’s 321%.
What are the negatives of ethical investing?
Sadly socially responsible investing isn’t yet sunshine, rainbows and happy days. There are still some wrinkles to be ironed out.
Many companies claim to be socially responsible but in fact aren’t. A case in point, Volkswagen who had a greener than greener, cleaner than clean image which proved to be just that, an image.
The definition of ESG isn’t entirely objective. Nuclear energy could be seen as a positive alternative to fossil fuels but in terms of the potentially damaging impact of a nuclear accident could be an environmental disaster.
Certain companies have made it into the ESG index for their excellent governance and reporting records while carrying out production practises which are damaging to the environment or are not known for fair labour practises.
Being 100% confident that your ethical investment choices are ethical is still a murky area but I believe as ethical investing continues to grow that investors will become more demanding in their requirements for compliance.
Is there an easy way to get started?
It is still a bit challenging for a beginner investor to invest ethically given the jargon and acronyms being thrown about in the financial service community.
The robo investing platforms have spotted this gap and are trying to make a difference with Nutmeg, Plum, Wealthify, Wealthsimple, Tickr and Tiller offering simple, clear ethical options from as little as £1.
You carry a significant amount of power in how you choose to use your money from how you spend it on regular items to more expensive things and now in how you choose to invest it. Imagine the difference you can make not only in your micro universe but also in the wider world by making a conscious choice to spend it wisely.