Historically, ethical investors were a segment of investors pursuing altruistic values, with religious and environmental groups paving the way. In recent years, the concept has expanded to encompass broader environmental, social and governance (ESG) criteria. In recognition of the impact that these factors can have on a company’s share price, many professional investors now incorporate them into their investment process. Today ethical solutions are typically designed to balance the need for a solid investment return with the aspiration to make a positive contribution to the world.
So what are the different types of ethical investment and how much of an impact can you achieve through your investment?
- Socially Responsible Investing (SRI) incorporates any element of ethical investing that considers environmental, social and corporate governance systems.
- Negative Screening takes a purely ethical stance, excluding specific areas that conflict with investors’ values (such as the current Fossil Fuel Free campaign run by many NGO’s).
- ESG integrates environmental, social and governance factors into fundamental investment analysis.
- Impact Investing integrates goals for positive impact on the world into the investment process.
- The Combined Approach (Ethical, ESG and Impact Investing) is the most effective way for investors to maximise their impact on the world through their investments, all without sacrificing investment performance if implemented correctly.
The chart below gives an indication, in our view, of the different levels of impact that investors can achieve. It ranges from non-consideration of these factors (mainstream) to philanthropy, which is the highest possible form of impact.
ESG analysis for example is an effective risk management approach. It can highlight operational inefficiencies while addressing intangible risks such as reputational damage and loss of customers. A few recent examples are the Volkswagen emissions scandal and the Wells Fargo accounts fraud.
Volkswagen had good scores in environmental and social factors, but had shown signs of governance weakness before the scandal. A dysfunctional share ownership and board structure resulted in power struggles rather than the correct oversight of emissions enforcement, creating an environment where the emissions scandal of 2015 could develop. Similarly in Wells Fargo, governance issues were at the heart of the scandal that saw employees opening millions of accounts fraudulently without customers’ knowledge, in order to meet aggressive sales targets. These examples resulted in serious consequences for investors, the environment and society as a whole.
Investors looking to accelerate environmental or social change while seeking to generate returns, are increasingly opting for impact investing. The business must provide solutions to environmental and social issues and there should not be a trade-off between financial performance and social/environmental impact returns.
Impact investing can be implemented across a variety of asset classes. For example, investors looking to advance the transition to a low carbon economy find that investment in renewable energy sources, is a good match for their objectives. If we add the urgency to address this risk in developing countries, social aspects become a significant driver of impact for this asset.
In our experience, impact investments act as a complement to a typical portfolio. In a world where most traditional assets such as equities and bonds are highly valued, carefully selecting impact investments can provide a strong risk-adjusted return alongside a positive impact on the world.
An ever-wider group of investors is using the combination of robust ESG screening and impact investing to augment their investment research and enhance investment returns. By 2016, funds managed under a responsible investment mandate were at a record $23 trillion, representing 26% of assets professionally managed in Europe, North America, Asia, Australia and New Zealand. Responsible investment is undoubtedly becoming more widespread.
In June 2017 Cantor Fitzgerald Ireland acquired L&P Group, an international consultancy specialising in ethical investment management, and stewardship services. The typical L&P long term portfolio is fossil free, generates over 30 times the renewable energy of a regular portfolio and has carbon emissions of one third of a regular portfolio, with plans to soon reduce this to zero. All of this is achieved while earning a strong investment return. During 2018, we’ll be bringing you a series of features on the benefits and merits of ethical investing.
To speak with a Portfolio Manager or Account Executive today, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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