We ask Amanda Young, Head of Global ESG Investment Research at Aberdeen Standard Investments, for her views on the exciting developments in the ethical sector. She talks about how the internet is transforming the way people choose to invest, and how we can all make good money choices and still enjoy the potential for good returns.
First things first – what’s Good Money Week and why does it matter?
The Good Money Week campaign helps to raise and grow awareness of sustainable, responsible and ethical finance. It’s a great way to engage people and let them know that they have options for their money.
We’re seeing many of the younger generation increasingly make the connection between their values and the companies they choose to use, work for, and invest in. And as more, especially younger, people start to put money into their pensions, it’s important to let them know they can invest and help make a difference at the same time.
Who we choose to bank or invest our money with can have an impact on the world. So it’s worth knowing about the sustainable and ethical options we have when it comes to our savings and investments – no matter how big or small these are.
Is demand for values-based investments increasing?
Absolutely – there’s no doubt that generally people are becoming more values-driven in their outlook and this is definitely feeding into how they think about their investments.
And, as this interest continues to grow, so does the range of investment options that can meet individual values and beliefs. We’re seeing a growing choice in ethical, responsible, sustainable and values-driven investment options.
Impact investment – investments that seek to generate a specified positive social and environmental outcome – is the latest exciting development.
You can see that as the choice of funds has increased, so too have the terms used. This can be confusing for investors, so it’s important to look at a fund’s strategy and what it invests in, and get advice if you need it. The good news is that many in the industry are working towards more consistent terminology.
Are companies coming under increased scrutiny?
Companies can’t operate in isolation anymore – nowadays their businesses, the types of products they manufacture and how they operate are all under the public gaze. This is largely due to the rise of the internet and ease of access to information. But it’s also increased awareness of the problems of the world.
The three key ethical challenges facing investors are:
• growing concern about climate change
• rising inequalities within society
• production and consumption rates given the world’s limited resources
The rise in knowledge and understanding of the causes of these problems has definitely increased questions about investments in certain companies, sectors and countries.
Over the past 20 years, the level of disclosure from companies about their operations has increased substantially. This is largely due to shareholders asking for more information from companies on how they’re looking after the environment, their employees and the communities in which they operate. Poor management of these issues can harm a company’s reputation and affect its ability to continue to operate profitably in the future.
BP’s Deepwater Horizon oil spill is a great example of how, within hours of the first spill, there were stories circulating on social media about the initial leak. Nowadays, companies need to have greater transparency of and greater accountability for their operations.
What’s the most positive change you’ve seen as a result of values-based investing?
For me, the biggest achievement is the increase in shareholder dialogue with management, and company boards taking increased ownership of environmental and social matters. Twenty years ago, if you’d asked the CEO of a mining company whether they had an environmental policy, most of them would have looked at you very oddly and asked why on earth they would need one of those.
Luckily, many company boards now have very different attitudes and understand that not only is behaving responsibly the right thing to do for the environment and society, it’s the right thing to do for the financial value and long-term sustainability of their businesses.
Can you make good money choices and still have potential for good returns?
There are many ‘good’ investment options on the market but, like all investments, performance can vary. So it’s important to consider the investment over the longer term and understand the investment manager’s strategy.
That said, there are ethical funds that have been around for 20 years that exclude a large part of the market and have produced competitive returns over this period. This shows that you absolutely can invest alongside your values without sacrificing the potential to make money.
Many believe that companies operating responsibly will be better managed companies over the longer term – and so avoid behaviours that would damage their reputation and share price.
Then there are the companies which can help provide solutions to some of the problems facing the world – climate change, rising inequalities and limited resources. These companies are finding ways to contribute towards a sustainable world, tap into new markets and generate positive growth.
What are the most recent developments in the ethical sector?
The growth of impact investing is the latest part of the sustainable investment movement – and it’s a very exciting development. Recently, we’ve witnessed a growing movement towards investments which set out to have an intentional, measurable and positive environmental or social impact. And that’s as well as seeking a financial return.
It’s really positive to see more and more investment strategies that are actively seeking out positive impacts, rather than just thinking about which industry sectors or companies not to invest in.
What tips do you have for an ethical investor?
Always know what you’re investing in. It really is key to make sure you understand the details of a fund’s ethical investment policy. And remember, just because a fund says it’s ethical or sustainable, doesn’t always mean it is.
Many funds out there label themselves as such but don’t actually have policies in place, or report on how these aspects are measured.
There’s a broad range of options available and these can be confusing, so don’t ever be afraid to ask the questions that matter to you.
Visit the Good Money Week website for more general guidance about sustainable and ethical investing. And if you want to take steps to connect your values with your money, take a look at the ethical options you can invest in through a Standard Life pension or ISA.
The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in September 2018. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.