1984… A year to remember, whether for Orwellian reasons, Band Aid, or perhaps the launch of the UK's first fully ethical fund, Friends Provident's Stewardship fund.
It reminds me of the hours I spent training up on that new fund when I worked in one of their satellite offices. I can recall its investment criteria specifically excluding sectors involved with tobacco, arms, alcohol and oppressive regimes but, more recently, the internet taught me something I didn't know. Apparently, it was originally nicknamed 'the Brazil fund' by city experts who found the notion of ethical investment as 'nuts'.
Fast forward to today and the Ethical, Social and Governance (ESG) landscape looks a very different place indeed. It's not just about the odd wind turbine improving or ruining your vista. Since 1984, investment in ethical funds has come a long way. Nowadays, and as with any investment, choice, diversity and opinions are key. Ethical investors will not only want to consider the obvious impacts of carbon emissions, renewable energy and climate change. There's the in-vogue security of one's data, not to mention the corruption and business ethics that we hear about.
To highlight the changing face of ethical investment, last year witnessed a record investment of around £100bn into active ethical funds, and in March this year alone, investors placed £138m into ethical funds, over 430% up on the amount invested during March 20171.
Let's take Millennials as an example. The next big financial event they will benefit from is the £6trn inheritance windfall heading their way over the next 20 years or so, and it is this group who have already formed strong connections with the ethical aspects of their everyday lives.
Flagged as an area of interest, this publication ran an article in January 2016, entitled 'Ethical investing – value as well as values'. Indeed, a six-month snapshot of data taken from Synaptic's Product & Fund tool between December 2017 and May 2018 highlighted that out of over 3,000 pieces of unit trust research conducted, 9% of cases selected the ethical flag.
Synaptic currently maintains ethical policy data for over a thousand funds. We are seeing advisers actively encouraging more fund managers to push ethical data to us, as they increasingly utilise Product and Fund to screen for more ethical funds. Technological advances and enhanced analytics are allowing Synaptic to receive and provide better ethical data than ever before. This means that we can offer transparent and accurate data which sits neatly with ESG research, offering an objective and financially relevant approach to customers' investment strategies.
This is all great news but do your customers still fully understand their own personal objectives when it comes to fulfilling their social conscience? We all want to contribute to saving our planet (beyond owning a bag for life!), but often, and I know I do this, we think "how can I, on my own, make such a difference if no-one else follows suit?".
We are now also acutely aware of the heightened profile new demographics such as Millennials and Generation Z enjoy. Through increasing media coverage, we are quickly learning that they are fast becoming financial powerhouses. Let's take Millennials as an example. The next big financial event they will benefit from is the £6trn inheritance windfall heading their way over the next 20 years or so, and it is this group who have already formed strong connections with the ethical aspects of their everyday lives.
Many Millennials already donate to campaigns and charities, or volunteer their services to various social, environmental or political causes. It should come as no surprise then that they recognise investment success should not only be measured by the ﬁnancial performance of their portfolio, but a longer term view of sustainability.
If this is a commonly shared view, as an adviser, how often are you obliged to expand your customers' grasp of what exactly sustainable or ethical investment means, and what the differences between ESG research and Sustainable and Responsible Investment (SRI) products are?
ESG and SRI are abbreviations often used in the same breath but they do have different roles to play. There has been an argument claiming that investments integrating with key ESG factors return poor performance, however recent studies have started to dispel that myth proving that ethical funds are demonstrating lower risk and outperforming portfolios over the medium to long term.
So, what is the difference? Put simply, ESG dictates the impact its practices have on the performance of an investment. Their integration is designed to enhance the more traditional financial analysis by identifying potential risks and opportunities. Only when society plays a part will financial performance remain the main objective of the ESG evaluation.
SRI goes one step further. Screening actively eliminates or selects investments according to specific ethical guidelines. Underpinning this could be your customer's religion, their personal values and/or political beliefs.
Perhaps the idea of ethical investment isn't nuts after all. Millennials certainly don't think so, but the question remains, "Can we keep pace with the demands of all ethical investors, no matter which demographic they belong to, and how much they have available to invest?".
Synaptic continues to offer up-to-date fund knowledge. The Product & Fund tool offers a section dedicated to 'ethical' funds and allows you to filter results based on your customers' investment needs and solutions.
- Source: Investment Association.