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Why Ethical Investments are Increasingly Relevant

From Blue Planet II showing how our oceans are full of plastic or the banning of plastic microbeads in soaps and cosmetics to the rise of Fairtrade products, it has been hard to escape the realisation that people are waking up to ethical and environmental concerns. This increasing awareness isn’t just limited to the physical products we buy, either – more investors are choosing portfolios that support their views on social and ethical concerns as well as meeting their financial goals and objectives.

When building our Ethical portfolios we aim, wherever possible, to use ethically screened investment funds to avoid unethical companies and favour those which make a positive social impact. You may already be aware of terms such as Socially Responsible Investing (SRI), which have become much more commonplace in the investment world. Additionally, many of the investment firms we work with have affiliated themselves with the UN’s Principles for Responsible Investment scheme – now signed by over 1300 global investment firms – which is encouraging investment companies to take a proactive approach to ethical investment.

From a business point of view it is easy to see why this would be beneficial to investment firms, with younger generations increasingly reporting that ethical and social considerations are an important factor in their investment decision-making.  Globally, SRI assets grew to $23tn in 2016 (which constitutes more than a quarter of the world’s total), according to the Global Sustainable Investment Alliance.

As well as having the advantage of being a genuine growth theme, a recent study by The Boston Consulting Group discovered that those companies whose practises were more ethical made higher profits and were valued more highly than their less conscientious counterparts.  This has played a part for most fund managers including SRI in their processes to some extent, and often reaches further than the traditional ethical approach of avoiding purveyors of tobacco, arms and alcohol. For example, Goldman Sachs Asset Management state: “Sustainability is ingrained in the investment approach employed in our GS India and Emerging Market portfolios. Our intensive programme of engagement, emphasis on cash flows over earnings and focus on returns over the cycle, results in a portfolio of companies with stronger ethical, social and governance practices.”

What is the future of ethical investing?

The largest specific asset group for this is equities, although bond markets are making up ground in this space too. Within this group we have seen the adoption of investments in forward-looking ‘clean’ technologies, not least in the widespread growth of electric vehicles, more specifically in the Lithium-ion batteries that power them.

Other elements of our portfolios are dedicated to green energy – notably Kames Diversified Monthly Income and VT Gravis Infrastructure Income – invest in alternative energy through wind and solar projects, including Greencoat UK Wind, Bluefield Solar Income, NextEnergy Solar fund, The Renewables Infrastructure Group and the Foresight Solar fund.  The average return from this handful of investments over the last three years (to the end of 2017) would have been almost 30% and volatility has generally been lower than that of the broader market.

Within fixed income markets, ‘Green bonds’ are ones in which the company, or government, commits to using the proceeds raised for a positive environmental project, such as making their factories more energy efficient or a specific climate-positive activity such as clean energy plants.

It’s not all about the environment, either. More specific pro-social bond investments are also evident in our portfolios, such as those made by Bryn Jones, manager of the Rathbones Ethical Bond (which recently broke through £1 billion in assets and was the number 1 performing fund in its sector over 2017) which has purchased bonds for new housing associations (‘Places for People’) and projects helping ex-offenders (‘Glasgow Together’) by employing them to build and refurbish homes. These assets are not only pro-social projects, but also provide a reliable income stream.

Ethical investments aren’t just important for meeting the preferences of the investors. Assets such as these are not only pro-social projects, they also provide a reliable income stream. Another example is the direct property fund managers we use, who emphasise the importance of energy efficient buildings. This not only reduces their carbon footprint and energy bills, but also makes it more likely that tenants will remain in the building for longer, making for investments that are more likely to provide positive returns.

Entering the Mainstream

With the rate of growth in these assets accelerating, fears among investors that these strategies may provide inferior returns are abating, and they have become a key part of our investment universe. An area of investments that was once considered niche and specialist is now an everyday part of investing, as well as a fruitful investment theme in its own right.

GDIM runs two portfolios dedicated to ethically-minded investing: GDIM Balanced Ethical and GDIM Conservative Ethical.

This article is for information only and does not constitute specific advice. Returns from investments are not guaranteed and you may get back less than the amount originally invested.

Tom Sparke GDIMTom Sparke IMC CertPFS (DM)
Investment Manager
GDIM: Discretionary Fund Managers