The surge of socially responsible investingPosted on: 04 February 2019 by Peter McGahan
Environmental, Social and Governance (ESG) investing is experiencing a boom as people seek to insure their money is invested ethically - but is performance positive or neutral?
Standing next to a plaque in the pure silent outback of Australia, the statement opened with ‘when the first Europeans came here…” …with no mention of the indigenous people who had lived there for 45,000 years before.
They say history is written by those in power, but it’s also written in the present tense in front of our eyes.
Ethical investing, or green investing made sense, but had a marketing perfume forcibly attached to it of a smelly tree hugging person, keen to stop the world moving on.
Ethical screening of investments was also synonymous with investment underperformance and perhaps justifiably, but whilst hierarchy and leaders flew around in helicopters and Trumpety jets, the disparity of message-to-action left most investors apathetic at best.
Its all change now though. We are in a world where we either just roll over and accept the extraordinarily blatant double standards of politicians, elite corporations and countries, or put our money where our mouths are and take action, and that has gathered exceptional pace with Environmental, Social and Governance (ESG) investing.
ESG investing has rocketed with its market share comparable to that of the movement into passive investing. Up 60% from $655 Billion in 2012, to over $1 Trillion in October last year, industry experts have it earmarked now as a key tipping point, with 80% of millennials interested or very interested in socially responsible investing.
Powerful documentaries such as John Pilger’s ‘the new rulers of the world’ have catapulted awareness to the unscrupulous nature of governments and corporations we are supposed to trust, and investors are using their power to not only influence, but also make superior returns.
The FT reminds us of more than 2,200 academic studies on the relationship between ESG and financial performance. The answer: Over 90% found that ESG has a positive or neutral impact on performance.
Think about ESG and how it makes sense. When assessing a company’s Environmental, Social and Governance standards, we have to consider factors that make the company sustainable. These factors drive standards that are sustainable and forward thinking, better managed, have a understanding of risk, are leaders in their field and meet high standards. If they are ticking ESG boxes they are very investable as they have superior business models.
We all know of the success investors have turning up at AGM’s to rattle the board. It’s seen in abundance, and now global leaders demand change at the door of the large investment companies alleging they ‘profit from killing’.
Part of the problem has occurred with index investing ie where we put money away and let it follow the stock market index with no investment changes. Index investors believe they have the cheapest product and cannot call markets and therefore invest and leave alone.
This plays straight into the hands of those large corporates who have all the power and no accountability.
At a basic level, I don’t buy Apple phones because of their extortionate price, poor value for money, and throw away attitude, and whilst I do that, I make little difference to the share price.
Trillions exiting from the market in a herd would be a different matter.
As a consequence, investment companies have been on the rampage launching new fund after fund to attract investors. Over the last six years, new funds jumped from 140 to 372, 229 of which were in Europe and astonishingly only 55 of which were in the US.
Similarly such socially conscious funds are more than double in size in Europe than the states.
Whilst I don’t shop at non tax paying corporations and organisations of poor standards, and I avoid visiting countries behind corrupt regimes, ESG screening has this impact en masse.
They also see the disadvantage of buying a non-tax paying corporation where returns do not cascade back into society via stock price, dividends or local taxation.
Over the years, these organisations climbed their profit ladders taking the rungs below with them, and those days could be coming to an end to the benefit of the ESG investor.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
If you would like advice on ESG investing, please call 01872 222422 or visit us on Worldwide Financial Planning.
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