Are we practising what we preach?

9 October 2018

We do a lot as consumers to minimise our impact on the environment. From cycling or walking instead of driving, to recycling as much of our household waste as possible, we each play our part.

If an incentive is thrown in, we’ll do even more: before the 5p charge on plastic bags in shops was introduced, each of us used, on average, 140 plastic bags a year. Now we use 19.

But while we’ve been happy to take action in our everyday lives, when it comes to our investments we’ve been a little slow on the uptake. Although ethical funds have been available for three decades now, of the £1,231 billion invested by UK retail investors, just 1.3% (£16.3 billion) is in ethical funds*.

Ethical funds start to gain traction

Using the power of capital markets to direct investment for a social good can drive significant positive change. And it does make financial sense. After all, if companies take into account all of the risks and impacts of their operations – including human rights, environmental issues and how they manage their employees – their businesses tend to be better managed. In turn, this can lead to outperformance over the longer term. And it seems we, as investors, are finally making the move: in June, ethical funds attracted 12% of total net inflows among fund buyers*.

Impact investing

A growing awareness that the companies we invest in have a direct impact on our environment and society is driving this change, according to Lesley Duncan, manager of Aberdeen Standard Investments UK Ethical fund.

“Nowadays there is a huge range of options for people who wish to match their investments to their values,” she says.

“These range from traditional ethical funds, which exclude ‘sin sector’ stocks such as alcohol, tobacco and arms companies, through to faith-based options and sustainability-themed funds that address issues such as climate change.”

Noelle Cazalis, deputy manager of the Rathbone Ethical Bond fund, a Moneywise First 50 fund, agrees: “Five years ago, it was about avoiding the negatives. While that still holds true, today the message is much more positive. It is about creating a positive impact, a positive contribution to our society.”

Investing for a better future

A big concern in society today is social inclusion and this represents a prominent theme for the Rathbone Ethical Bond fund. Here, investments encompass housing associations and charities with diverse beneficiaries, including the elderly and those with learning disabilities.

Another major issue is our use of plastics and, more importantly, our disposal of them. Fund manager EdenTree has signed up to a number of initiatives that aim to tackle this issue, including the Plastic Solutions Investor Alliance.

Underlying investments in the EdenTree Amity UK fund include Renewi, which recycles more than 14 million tonnes of waste back into raw materials or energy every year. Meanwhile, packaging company DS Smith follows nine long-term sustainability targets – ranging from 100% reusable/recyclable packaging products by 2025.

Of the £1,231bn invested, just 1.3% is in ethical funds

Social inclusion and plastics’ use are just two of a plethora of themes that are being addressed in ethical funds today. The list also features climate change and gender diversity. As we become more responsible for our own financial futures, there is no reason why we can’t profit from our investments in a way that benefits our environment and society.

Perhaps it is time to practise more of what we preach.

* Source: Investment Association, June 2018

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre