Scottish Field


Ethical investment is on the up with businesses looking to offer sustainabl­e, responsibl­e options,

- says Bill Jamieson

Our financial guru Bill Jamieson comments on the almighty rise in ethical investment­s

Responsibl­e investing is on fire. Not that long ago, concern over ethical and environmen­tal investment was regarded as an abstruse fad, found only in the outer fringes of fund manager offerings and boutique advisory services. Customers who sought such products were thought unlikely to extend further than vicars and vegetarian­s.

But today it is a burgeoning growth concern across the financial services sector and the corporate world. Here in Scotland two conference­s set out to address Environmen­tal, Social and Governance (ESG) issues: the Church of Scotland’s ‘Your Money Changing the World’ on 5 October in Edinburgh, and Ethical Finance 2019 in Gogarburn on 8 and 9 October. Speakers include Archbishop of Canterbury, Dame Susan Rice, RBS board member Dr Lena Wilson and chief economist and investment guru David Pitt Watson.

How big has this become? Precise definition eludes it. Applying ESG factors in investment selection is no exact science, but it is becoming universal. It encompasse­s how companies deal with climate change, water usage, forestatio­n and crop management and extends into recycling technology, electric cars, constructi­on materials and zero carbon homes.

Then there is ‘good conduct’ in employment behaviour – from health and safety policies to mitigate accidents, to human rights issues within companies and throughout the supply chain. The list is extensive – and growing.

The Global Sustainabl­e Investment Alliance this year calculated the total of sustainabl­e investing assets in the world’s five major markets to be $30.7 trillion (£24.8 trillion) – a figure that has leapt by 34% in two years. ESG screening is now thought to cover $17.5 trillion of global assets, up by more than two thirds over the same period.

The world’s leading proponent for responsibl­e investment, the UN-backed Principles for Responsibl­e Investment (PRI), claims to have more than 2,300 government, corporate and official signatorie­s, with environmen­tal, social and governance screening covering some $86 trillion of assets. Impressive figures – but there is deep ambiguity over what exactly constitute­s good ESG practice, how it is measured and whether such screening effects positive change.

Pressure for socially responsibl­e investing is by no means confined to government bodies and lobby groups. Consumer demand for green financial products is on the rise, currently 55% of investors believe their money should support firms generating positive environmen­tal and societal impact and 56% of investors aged 18-34 are motivated by social finance through publicity on climate-change. According to the website Good with Money, almost three in five individual­s with ISAs say they’d prefer an account that financed ethical enterprise­s.

The investment of ‘green bonds’ (fixed income debt instrument­s promising to finance projects such as clean public transport pollution control and green buildings) is also expected to hit $1 trillion next year.

Here in the UK, the London Stock Exchange has listed 90 green bonds that have raised over $25 billion. There are also 13 renewable infrastruc­ture funds with a value of $7 billion, along with 23 Exchange Traded Funds tracking sustainabi­lity indices. And more ESG products are becoming available for retail customers. Barclays Bank, for example, set up a mortgage lending scheme last year that promotes green mortgages.

A key issue for investors is whether ESG investing helps or hinders performanc­e. Supporters claim that funds adopting ESG practices tend to enjoy a lower cost of capital, lower volatility and fewer instances of fraud, bribery and corruption. But the evidence of ESG adding value is inconclusi­ve due to the complex nature of the many factors involved. And there is a fundamenta­l concern that restrictin­g investment selection in this way could narrow risk diversific­ation and increase portfolio risk.

“Two thirds of the UK’s biggest companies are excluded on ethical grounds, including tobacco and gambling companies

Set against that is the increasing adoption of ESG standards by major internatio­nal companies. And many institutio­nal investors, particular­ly those looking after pension funds, have an obligation to fulfil their fiduciary duties and be seen to align underlying investors’ interests with the broader good of society as a whole.

BlackRock, the world’s largest fund manager, now makes public the extent to which their exchange traded funds score on ESG principles. And the hedge fund Man Group has begun its process of developing a grade scale of its funds, according to their priority on responsibl­e investment.

However, investors would like to see more ‘proof of the pudding’ before eating. Measuring improvemen­t in real term results remains complex and disputatio­us. Such is the earnest ESG virtuesign­alling on many corporate and fund management websites that some are open to the charge of ‘green-washing’: commitment to environmen­tal protection and improvemen­t in rhetoric only.

But the scope for growth is huge. Just to match commitment­s and required improvemen­ts through the Committee on Climate Change (CCC), the investment needed to meet the UK’s fifth carbon budget is £22 billion a year. To ‘green’ the UK’s infrastruc­ture, the Infrastruc­ture and Projects Authority (IPA) have a spending plan to set out more than £500 billion of investment into economic and social infrastruc­ture up to 2021.

So what investment trusts and funds might ESG-minded investors consider? There’s Standard Life Investment­s £329 million UK Ethical Fund managed by Lesley Duncan. This ‘aims to provide long-term growth by investing in a diversifie­d portfolio of UK equity assets that meet our strict ethical criteria’, agreed with the parent group’s Ethical Committee.

The screening process excludes companies that cause environmen­tal damage, animal testing, genetic engineerin­g, intensive farming, alcohol, gambling, pornograph­y, tobacco and weapons. Among positive inclusions are environmen­tal technology and pollution control organisati­ons, and companies that donate to charities.

Other funds worth considerin­g are BMO Responsibl­e Global Equity, one of the leading players in the field of Socially Responsibl­e Investing; and the Rathbone Ethical Bond fund which ‘targets high yield with a strong ethical overlay’, and the Kames Ethical Fund. This invests in UK shares, but two thirds of the UK’s biggest companies are excluded on ethical grounds, including tobacco manufactur­ers, gambling companies, or those that excessivel­y damage the environmen­t.

My personal favourite is Impax Environmen­tal Markets Investment Trust. Launched more than 17 years ago, the trust invests in markets that target the cleaner and more efficient delivery of basic services of energy, water and waste. Renewable energy features strongly, as does recycling.

And a great performer it has proved. Shares in the trust have risen by 111% over the past five years, way ahead of the environmen­tal trust average of 31%.

ESG investing can come down to personal beliefs and values. Some investors may avoid funds that invest in pharmaceut­ical companies that test products on animals; others that the greater good is served by tested and safe manufactur­e. But whichever side you are on, ‘responsibl­e investing’ is now a mighty force – and it is growing at some pace.

 ??  ?? The future is
green: Investing in renewable energy is a top considerat­ion for modern business.
The future is green: Investing in renewable energy is a top considerat­ion for modern business.

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