As I ran through the sweltering summer streets of Bristol recently, hauling my luggage and melting in my suit, I admit to harbouring more than a few unprintable words about the extinction rebellion protesters who had blocked the roads and prevented my taxi getting to the train station on time.
On reflection, once I'd made myself comfortable on the train and begun to cool down, I had to admit that I agree with most of the objectives of the protest – although perhaps not with some of the methods used.
While most of us haven't quite reached the point of taking to the streets in protest, more and more of us are taking positive action by taking greater care in our investment choices. In our work with both advisers and fund groups, RSMR has noticed an increasing appetite for funds that broadly follow a socially responsible investment (SRI) theme and there's no doubt that these types of funds are now becoming part of the mainstream.
Since 2012, when RSMR launched its SRI fund rating, we've seen significant changes in this area of the market. The traditional method of ethical investing is to focus almost entirely on issues, sectors and companies that investors might wish to avoid (ie – animal testing, armaments, tobacco) and this is still an approach that's employed successfully by some fund managers using a negative screening policy.
Increasingly though, we are seeing a shift towards a more positive screening approach that focuses on sectors and companies that are making a positive contribution to certain environmental, social or governance factors (ESG) such as climate change, human rights or scarcity of resources. This positive screening approach has led to the launch of a number of thematic funds that invest in companies or themes that are creating solutions to environmental or social issues. One of the growing themes of positive screening is sustainability, which is an approach that supports socially and environmentally efficient companies that operate responsible business practices.
In short, when it comes to SRI/ethical investing, there are a number of different approaches. This leads us on to one of the most common questions that I get asked by advisers – how can I construct a portfolio that meets the broader ethical aims of an investor while still providing a suitable level of risk?
For RSMR, it begins with asset allocation and a decision on how much to allocate to cash, fixed interest, UK and international equities and alternatives in order to fall within the required risk parameters. Once we've completed this first part, we then populate our models with RSMR SRI rated funds.
We're fortunate at RSMR in that we have a wealth of information at our fingertips from the detailed research we've conducted – our SRI rated funds demonstrate strong ethical credentials and a disciplined process. And no, we won't be fooled by the recent phenomenon of funds 'greenwashing' themselves.
This body of research provides a reasonable number of funds from which we can build different portfolios, safe in the knowledge that we not only understand how each individual fund works – but also how the overall strategy can be expected to behave based on the funds that are being blended together. This is the way that we've built our three discretionary SRI models, which match Synaptic risk levels 2,3 and 5.
RSMR's SRI ratings are freely available on the RSMR Research Hub – so advisers can use this as a resource from which to select funds for their own portfolios. But as with the construction of any portfolio, it's important to ensure that funds are selected in a way that ensures maximum diversity – never more so than in the SRI arena where there are so many specific themes represented.
The one concern that's often voiced about an ethical investment approach is that performance might be compromised, but that doesn't have to be the case. It's true that SRI funds might have some inherent investment biases, whether that's at sector level (for example the avoidance of mining) or in the style of investing (SRI equity funds are generally growth orientated). Should these particular sectors or styles be out of favour then SRI funds might underperform, but conversely if the opposite were true then SRI might outperform.
RSMR's view is that the ability of the fund manager and the strength of the overall investment process is the key factor in determining long term returns. There's no doubt that society is becoming more aware of the social and environmental challenges that face us, and for many investors, these considerations are beginning to inform the investment choices that they make.
It's important that advisers have a suitable option to offer when faced with an investor who wants to take a more ethical approach with their investment planning. This can be tackled either through the construction of some in-house portfolios (please feel free to use RSMR SRI ratings to help with portfolio construction) or through the use of discretionary SRI portfolios (hint hint; RSMR has three Synaptic risk-rated models).
Whichever route you decide to take, it's clear that the nation's investable assets are slowly migrating into the hands of investors who are more socially and environmentally aware. Your clients might not be stopping traffic at a protest, but they will increasingly be interested in where their money is invested – so be prepared.