THE GREATER GOOD
With more companies and investors jumping on the ‘sustainable development’ bandwagon, clarity and transparency are essential, explains Bill Jamieson
Bill Jamieson puts ethical investment under the spotlight
Throughout the last two centuries Scots have been at the forefront of innovative and far-reaching investment ideas. Scottish finance played a significant role in the development and growth of investment trusts. These made a distinctive contribution to the economic development of the United States and in particular the financing of farming in the mid-west and the development of the country’s railways.
This innovative spirit continues today, and will be evident again with the launch later this year of a new global Scottish investment trust specialising in sustainable development.
It is one of the most potent investment themes of the era, addressing growing concerns on a broad range of fronts, including the stewardship of our environment, conservation, renewable energy and social infrastructure.
That is a broad waterfront. And this area is not without many uncertainties and risks – the least of these being its definition. What is ‘sustainable’? Or a ‘socially responsible’ company? The new Global Sustainability Trust has set itself a formidable task in bringing together many aspiring objectives in one over-arching fund.
The groundwork has been done by Edinburgh corporate legal firm Dickson Minto and early-stage funding of this initiative has been supported by a diverse range of companies and organisations including the Gloag Foundation, private banking group Hottinger and Dunelm Energy.
The board is looking to secure £50 million-plus of ‘soft’ commitments from sources including pension funds and charitable foundations before searching for an established asset manager.
Presentations have already begun, with an event at the Signet Library in Edinburgh last month and while no target figure has been released it is expected that the new Global Sustainability Trust will have immediate and high profile appeal for a large number of institutions, independent financial advisers (IFAs) and high net worth individuals.
The forum brought forth further support and encouragement. Partner at Dickson Minto, Douglas Armstrong, and his team have subsequently met two front runners to act as manager to the trust. There is a panel made up of an individual from the UN, a pension fund manager, an impact venture capitalist and Andrew Dykes, who will be leading the interviews.
He expects to finalise the choice of manager by the end of July and start the detailed work on an Initial Public Offering (IPO) – the first sale of shares issued by a company to the public. A realistic formal launch date will be in early October with the IPO happening in November: ‘All in all,’ he adds, ‘it’s very, encouraging.’
Investment trusts specialising in these areas are not new, and the GST faces stiff competition. Current funds available for investors include, for example, Greencoat UK Wind, the Target Healthcare Real Estate Investment Trust and Impax Environmental Markets.
In the wake of corporate scandals in recent years, fund managers have rushed to launch ‘green’ or ‘socially responsible’ funds to catch the trend for investment in ethically sound businesses.
The number of passive funds prioritising green and socially responsible companies has climbed to a record high while figures from the London Stock Exchange show that more exchange traded funds (ETFs) with environmental or social goals (ESGs) entered the market in May than any previous month.
Ten tagged as environmentally or socially responsible have been listed in London so far this year, compared with six for the whole of 2017. Eight joined the market in May alone, taking the number of ‘ethical’ ETFs to 32, with £3.97 billion of assets under management.
So there is growing demand among retail investors for ethical funds – with younger investors
in particular more concerned than their predecessors about issues including climate change and the environment. A YouGov poll found more than 44% of millennials believed that backing ethical firms could bring about positive social change.
That’s all very encouraging, but we need to be surer that this ethical investing is all that it’s claiming to be. Diesel-fuelled cars were once officially hailed as clean energy – until they weren’t.
Bio-fuel was hailed as environmentally friendly – until second thoughts set in. Financial institutions trade on their ‘good corporate governance’ credentials – but the Co-Op Bank and problems at TSB have muddied the waters.
Oil companies are seen as the bane of ethical investors. Yet they spend huge amounts in funding research into clean technology and non-fossil fuels. What is it that investor grading of companies in this way will achieve that ever-more prescriptive legal and regulatory obligations, already working to effect behavioural change, will not?
Many so-called ethical or ‘green’ funds have holdings in companies that some would regard as inappropriate.
One well-established investment trust, for example, applies an ESG score test or screen to all its investments, but has arms manufacturer Bae Systems and oil majors BP and Shell among its top ten holdings.
Critics have warned of ‘greenwashing’, running a layer of ethical marketing or rhetoric over business as usual.
The Global Sustainability Trust features social impact investing – offering exposure to organisations that carry out socially valuable activities, from providing clean water to fighting poverty and encouraging healthier lifestyles.
Companies would not only measure and report their wider impact on society but also hold themselves accountable for delivering and increasing positive impact.
A closely related species is the broader environmental, social and governance approach. The difference? It may come down to intention – social impact investing specifically targets companies and organisations that intentionally create a positive social benefit, either as a primary or secondary purpose.
Social impact investments span dedicated bond funds, direct lending and equity exposure. Still, for the time being, social impact investing is a much smaller market than ESG. One reason is the widespread assumption that one can’t support social causes and produce market-rate returns at the same time. But, say social impact campaigners, it is a false dichotomy: it is possible for investors who want to achieve market rate returns to also create positive social impact with their investments.
The UK impact investing market, including both social and environmental impact, is currently worth £150 billion. This is based on a definition specifying that investments are made with the intention of creating a positive outcome. Opinion poll research shows that 56% of people are interested in purchasing social impact investment products, yet there is a persistent gap between this expression of interest and the actions they take, with just 9% actually investing in the sector.
The Global Sustainability Trust may win many expressions of sympathy, but converting these into active commitment will be its biggest challenge.
“Many so-called ethical or ‘green’ funds have holdings in companies that some would regard as inappropriate