From plastics to palm oil, ethical consumerism is booming. The financial services sector has taken note, with a raft of Ethical Investment funds now available to conscientious investors. In this article, guest authors Stacey Parrinder-Johnson CAIA, Investec Wealth & Investment Senior Fund Selection Specialist and Christopher Clay LLB (Hons) Chartered FCSI Dip PFS, Investec Wealth & Investment Senior Investment Director explain the various options available.
The rise of Ethical Investment
There are so many terms involved in responsible investment that it’s hard to know how to differentiate them. Ethical Investing is mostly focused on removing negative factors from a portfolio, so Ethical funds won’t invest in companies that use animal testing or sell pornography (exclusions vary from fund to fund).
Over the past ten years or so, we have seen managers moving away from this purely negative way of screening a portfolio, to look for those businesses who offer some positive benefit to society through their products or services. For example, those who offer inclusive finance products or green energy solutions. This type of strategy is generally referred to as Socially Responsible Investing (SRI).
Both of these types of funds tend to focus on smaller and medium sized companies, either because of what they screen out (large sectors of the FTSE100 index, such as Oil, Mining and Pharmaceuticals are often screened out of Ethical funds) or the SRI focus on finding newer entrants to the market who are offering something different and challenging large incumbents.
’Explosion’ of socially responsible investing
What we are seeing at the moment is an explosion in popularity of ESG funds, which is a third example of socially responsible investing. ESG focuses on better understanding how any company – whatever the size – manages its environmental (E) and social responsibilities (S), as well as how well it is governed (G).
Rather than removing companies, or adding the ‘next best thing’, those who manage ESG funds are looking to these three things as part of an assessment of how well a company will do in the future – for example a company with a poor environmental record might have to pay damages in the future.
Additionally, those who manage ESG funds can use the weight of their shareholding to engage with companies to try and encourage them to change – examples here include the promotion of the living wage, or best practice in their parental leave policies.
Sustainable investing offers all-round solution
The final type of responsible investment fund falls under the banner of ‘Sustainability’. Sustainability funds combine all three of the other methods – generally using a pragmatic negative screen to remove what they see as the ‘worst offenders’ such as tobacco and armaments, using ESG to assess companies, and searching for those who can offer growth through new, responsible, business alternatives.
This Ethical Investment article has been published by kind permission of Investec Wealth & Investment Limited. Special thanks to our guest authors Stacey Parrinder-Johnson CAIA, Investec Wealth & Investment Senior Fund Selection Specialist and Christopher Clay LLB (Hons) Chartered FCSI Dip PFS, Investec Wealth & Investment Senior Investment Director. For further guidance regarding Ethical Investing, please visit Investec.