Many of us have become more conscious in recent years about whether the money we spend, save and invest is a force for good or ill. But in the face of this year’s global health crisis, it may have felt tempting to put some of our good intentions on the back burner.
Perhaps how and where you choose to invest any savings is one of the things that’s been relegated down your list of priorities? After all, investing feels focused on the future, whereas the last year has demanded immediate crisis management as we concentrate on staying safe, stocked up and solvent. However, there hasn’t been a more pertinent time to embrace impact investing – choosing investments that support positive change for people and the planet. For one thing, in contrast to the 2008 global financial crisis, individuals and institutions alike have been forced this year to confront the full financial fallout of non-financial crises – whether the health pandemic, social inequality or the climate emergency.
Indeed, according to research from the financial service business Morningstar, global inflows into ethical investment funds rose 72% in the second quarter of this year to $71.1bn (£55.2bn), continuing their long-term upward trajectory. By the end of June 2020, total global investment into ethical funds topped $1tn for the first time – almost doubling over the past two years.
So here are five reasons why now might be the perfect time to embrace ethical and sustainable impact investing:
1. It has never felt more urgent
From the actions of Extinction Rebellion to the wildfires in Australia and America, we aren’t short of warnings that the climate emergency demands urgent action on every single front. But the global health pandemic has made things even more urgent by showing us the full fallout of a global crisis.
It has forced us all to reassess what’s really important, shown us the crucial role that businesses play in society and taught us to reward those companies that step up to meet our acute social challenges.
So it feels imperative that we use all the means and tools at our disposal to push businesses to do better – whether by reducing their emissions in response to the climate emergency, addressing social inequality or paying their fair share of taxes. Our savings and investments can be among the most powerful tools because where we choose to invest them can impact the wider choices made by corporations – and in turn impact on society and the environment.
2. Investor engagement and influence is working
Contrary to the expectations of cynics, investors have actually ramped up pressure on companies to address the risks and opportunities of climate change in 2020, with increasing success. This typically happens when investors (or fund managers acting on their behalf) use their shares’ voting rights to engage with companies, ask them questions, challenge them and put forward proposals to improve a business’s environmental, social and governance practices. In 2020, there have been 140 climate-related shareholder proposals at annual general meetings in the US – a country that is often regarded as a laggard in this area – according to the sustainability non-profit organisation Ceres. And 40% of these shareholder proposals were withdrawn by the filing investor because sufficiently strong commitments were given by the company to address the issue raised in the proposal.
Where climate proposals did proceed to voting, investors continued to flex their muscles. Six won majority votes in 2020 compared with only one in 2019.
Triodos Investment Management, a globally recognised leader in impact investing, actively votes against management proposals that aren’t aligned with its vision – 28% of the votes it cast in 2019 were against company proposals.
In a blog post about last year’s shareholder votes, Rob Berridge, director of shareholder engagement at Ceres, concluded: “Despite investors’ focus on recovery from market losses as a result of the pandemic and their attention on racial justice issues, savvy investors continue to be deeply concerned about the impact of climate change on their portfolios and the global economy.”
Aside from formal shareholder resolutions, “soft influence” has become equally important. Many investment funds now have corporate engagement policies, which involves them influencing investee companies to meet sustainability expectations.
At Triodos this can be seen through active stewardship. It begins from the company analysis and develops into a relationship, including dialogue and voting.
3. Returns that work for you and the planet
Stock market indices suggest that ethical and impact investing can increasingly lead to higher returns. For example, the FTSE Environmental Opportunities Index Series – comprising companies that have significant involvement in environmental business activities – produced an annual compound return over five years of 14.6% for the period ending 31 August 2020, with more general market indices, the MSCI All Country World Index, the S&P 500 (comprising US-based companies), and the FTSE 100 returning 10.2%, 12.2% and -0.9% respectively.
Analysis by the financial services business Morningstar of more than 4,900 investment funds showed that over a 10-year period to 2019, 58.8% of sustainable funds had beaten their average surviving traditional peer. Its research also shows that sustainable funds weathered the February-March 2020 market crash better than most. For example, in the three months ending March 2020, the FTSE Environmental Opportunities Index Series dropped 15.5%, compared with a 24.8% drop in the FTSE 100.
And if you aren’t investing your savings in anything yet, it’s sobering to bear in mind that the case for parking money in the bank has taken another blow in 2020, with the Bank of England cutting its base rate from 0.75% to 0.1%. The Bank of England has said it will be keeping interest rates low to make borrowing cheaper and help households and businesses weather the Covid-19 induced economic storm. There is even talk of negative interest rates from within the bank, a bleak outlook for savers. The latest average inflation forecast for 2021 is 1.7%, with some forecasting over 3%. But you’ll be hard-pressed to find a bank paying even 1% interest on your savings.
However, bear in mind that investments come with higher risks than bank deposits, and can go down as well as up. Past performance is not a guide to future returns and sustainable and impact investments are long term (five years or more).
4. The risks of ignoring sustainability
This year has finally taught us that investment risks do not necessarily come from financial crises, they come from real-world crises too.
The former Bank of England governor Mark Carney is a proponent of highlighting the financial risks of ignoring sustainability. In an October 2019 speech, he said: “Changes in climate policies, new technologies, and growing physical risks will prompt reassessments of the values of virtually every financial asset. Firms that align their business models to the transition to a net zero world will be rewarded handsomely. Those that fail to adapt will cease to exist.”
Now the UN Special Envoy for climate action and finance, Carney built on this theme in the WWF film Our Planet: Too Big to Fail. In it he points out the financial risks of failing to act now. “If we continue to downplay the scale of the transition that needs to happen … then the adjustment when it comes will be far more severe. The biggest risk is inaction.”
For instance, car manufacturers that have been slow to embrace electric vehicles will have to change tack to deal with the ban on sales of petrol, diesel and hybrid cars being brought forward to 2035 in the UK. They also risk losing out to more sustainable competitors. And all companies – insurance companies in particular – that don’t pay enough attention to the increasing threat of damage caused by more frequent extreme weather events or rising sea levels, risk significant financial loss.
Indeed, there is an argument that more ethically, socially and environmentally responsible companies often perform better than their peers precisely because they have a better perspective when it comes to these risks.
5. You’ve never had so many options
If you choose to invest more ethically via funds, your options are opening up at speed. Morningstar identified 3,432 sustainable funds around the world at the end of June 2020, with 125 new sustainable funds launching in the second quarter of 2020 alone. Europe is home to the bulk of these, with 2,706 sustainable funds. Morningstar defines these as funds that use ESG criteria as a key part of their selection process and/or indicate that they pursue a sustainability-related theme and/or seek a measurable positive impact alongside financial return.
These also include funds that package together fixed-income bonds such as impact bonds, green bonds and social bonds. Bonds represent a lower risk (and usually deliver lower returns in the long run) than investing in shares as they are essentially loans that pay back with interest. Triodos Investment Management recently launched the Triodos Sterling Bond Impact Fund, which consists of bonds issued by companies that meet its impact investing criteria.
However, while investors now have more choice when it comes to ethical and impactful investing, it is important to be sure about what you are buying into by checking that the funds are completely transparent. With no standardised terms in place, some companies and funds can make ethical and sustainable claims that don’t stand up to scrutiny – indeed, not all funds labelled as ethical exclude fossil fuels, for instance. It’s also important to ensure that fund managers measure the full impact of their funds, for example in terms of CO2 reduction and water conservation. Ask for the full list of companies included in any fund you are considering investing in, and see if they match your values.
Making a difference
Triodos Impact Investments funds focus on driving positive environmental and societal change around the world and work hard to deliver competitive financial returns. You can invest in the funds directly or via the tax-efficient Triodos Stocks & Shares ISA.
Please note that with investments in ethical funds and companies, as with all investments, past performance is not a guide to future returns and you may not get back the amount that you originally invested.
The tax benefits of an ISA are subject to change and depend on individual circumstances.
Investing using your own ethical principles alongside financial returns to select an investment and excluding funds and companies that fall short of your ethical standards.
ESG (Environmental, Social, and Governance)
The standard criteria used to analyse a company's social practices, which are used for selecting ethical investments. But as ESG factors can have a material effect on the performance of a company, they are also used to evaluate financial returns.
The process of filtering out those companies that harm people or the planet. For instance, investors might exclude those related to arms, fossil fuels, tobacco and animal testing.
As well excluding companies that harm people or the planet, this involves investing to generate a positive, measurable social and environmental impact alongside a financial return.
Triodos identifies companies that positively contribute towards a more sustainable future using seven sustainable transition themes.
This article was originally published on theguardian.com as part of the Triodos Bank UK and Guardian Labs impact investing campaign.