Let's not beat around the bush – 2020 has been a dreadful year. With winter quickly approaching and Covid-19 cases rising once again, many of us will continue to share a nagging sense of vulnerability and concern for the welfare of our family, friends and colleagues.
Living through a pandemic has been a surreal experience and I doubt that anyone could say that they were prepared for bubbles, mask wearing, rules of six and three tier alert levels – and yet social distancing has highlighted just how closely interconnected we are as a society and how quickly that can fall apart.
The history & surge of ethical funds
It's perhaps not surprising that amidst the turmoil and upheaval of 2020, the popularity of investments with an ethical theme has continued to grow. Even before the pandemic we were seeing a surge, with Morningstar reporting a flow of £27bn into responsible-themed investments in the first three months of the year (compared to total outflows of £133bn across European funds).
As demand has increased, so have the solutions that are offered by the fund industry. In the early 20th Century, the Methodist Church began investing in the stock market and avoided gambling and alcohol. The first ethical fund, The Pax World Fund, was launched in the US in 1971 with its roots in the anti-Vietnam War movement – avoiding companies that profited from military spending. The UK saw its first ethically screened fund, Friends Provident's Stewardship Fund, launched in 1984.
This traditional approach, where a fund manager will screen out certain stocks according to a fairly broad set of ethical principles, has been supplemented in recent years with a wider choice of funds that are labelled in some way as 'ethical', and we're now seeing a real surge in new fund launches. In 2006 there was a total of 75 funds labelled as ethical available in the UK – fast forward to 2020 and there are over 2500 available funds, with 70 new funds launched in the first three months of the year.
Choice & complexity
Greater fund choices are a positive sign that money is increasingly being invested in a principled way, but with greater choice comes greater complexity, competing terminology and (as with all funds) the need for scrutiny to make sure a fund 'does what it says on the tin'.
This can make it difficult for investors to truly understand what they're investing in. The description of 'ethical' is very subjective – take Tesla as an example – leading the car industry away from fossil fuels, but with batteries containing cobalt and nickel that are mined from some of Africa's most poverty-stricken countries.
On a personal level, most investors will understand the word 'ethical' as it applies to their own beliefs. The difficulty then is; how do they choose the right investment to match? The fund industry has yet to come up with a clear way of consistently labelling funds, so investors are faced with all kinds of different descriptions and acronyms that can be confusing.
Greenwashing & standardised reporting
Added to this, there's the dreaded 'greenwashing' to look out for. These are funds that market themselves as delivering some form of ethical objective, but a peek underneath the marketing blurb would leave most ethical investors sadly disappointed. Thankfully, the FCA are tackling this and by 2022 we should expect to see all funds providing standardised reporting on their environmental impact. Arguably this needs to go further, but it's a start.
Our commitment to SRI
RSMR has been involved in this area of the market since 2012, when we launched our SRI rating. Our fund rating process has always placed a greater emphasis on the qualitative elements of how a fund is managed and we've also worked closely over the years with SRI Services and its Fund EcoMarket tool.
By combining our own expertise in understanding and assessing fund managers, together with the resources of SRI Services to dig deeper into the approach that each manager takes, we're able to look past the marketing and identify fund managers that have the specialised knowledge and expertise to manage money in a responsible way.
Doing our bit for the acronym count
We've also recently decided to do our bit to reduce the acronym count. From October 2020 we'll be revamping our SRI rating as 'Responsible'. We'll also be renaming our three discretionary MPS models as Responsible Cautious, Balanced and Dynamic.
It's a small change but we feel it's an important and positive step in helping advisers with client communication, allowing them to talk about investment choices without getting bogged down by industry terminology.
Until recently, one of the biggest barriers to investing in a responsible way was the perception that performance might be sacrificed, but that perception has been thoroughly debunked as we've seen these types of funds behave resiliently through a difficult 2020.
Investing in a responsible way is never likely to be straightforward. All investors are individuals, each with their own moral compass that dictates where they wish to invest their money. Many of them, if asked, will undoubtedly prefer to invest their money in a way that's responsible - especially if they know they won't have to sacrifice their returns.