Ethical Investing Sept 2019
Reflecting on the Growth of Sustainable Investing
SR Investing is socially responsible investing and is a style of investing that excludes certain Companies that might not be good for our society, might not have proper governance in place and might not be good for our environment. When you are investing in an SRI way you might not find Stocks and Companies that deal with alcohol, tobacco, firearms or things that are traditionally called “Sin Stocks”.
Some of the pros of SR investing is that you can actually have an impact on the way that we are shaping the world today. Companies that treat government or society or the environment in negative way now have a say about where your money goes. One of the cons has typically been that SRI investing has been a drag on performance, but recent studies have shown that that is actually not the case and what we are seeing in the data is that you can be socially responsible and not necessarily give up some of the at performance.
Sustainable investing has gone from afterthought to mainstream for many Investors. Studies have shown that SRI investing is popular amongst specifically millennials and women. Both of these groups tend to invest in order to make a clear and measured positive impact on society, not just to generate profit.
There are a number of reasons why SRI investing has gained significant traction in recent years. The near collapse of the banking system in 2008 highlighted to investors the damages of prioritising short-term profitability. Obviously, the growing threat from climate change is playing a big part too. Also, with the exception of the US, Government support is now also providing a boost. In March 2018, the European Commission released an action plan for financing sustainable growth.
Most important SRI issues for Investors
Environmental
Climate change
Water
Sustainable land use
Fracking
Methane
Plastics
Governance
Tax avoidance
Executive pay
Corruption
Director nominations
Cyber security
Social
Diversity
Human rights and labour standards
Employee relations
Conflict zones
How SR Investment Managers tackle these issues
Traditionally investment managers measure a company’s performance through metrics such as sales growth, market share and valuation. There is now a growing need to address sustainability factors, alongside conventional securities analysis.
SRI investors typically evaluate companies under the 3 themes - Environmental, Social and Governance as noted in table above.
There are three general methods of screening an individual company for inclusion into an SRI fund; the Negative Screen, the Positive Screen and the Restricted Screen. A Negative Screen, for example, could be a fund manager’s conscious decision not to invest in a company that has a poor record in high carbon emissions or poor waste management. They might also exclude a specific sector such as Tobacco or gambling. Other SRI investments might seek out and invest only in companies which are involved in activities that promote “green living,” such as wind or solar power; those types of investment are then referred to as a “Positive Screen.”
Because many companies tend to become highly diversified as they grow, SRI fund managers make use of a “Restricted Screen” type of filtration. In that way, though a small part of the corporation’s activities may be in a less than desirable sector because the amount is so small relative to the rest of the company’s holdings the SRI investment in the corporation would be permitted.
SRI funds typically narrow the investment universe by excluding companies involved in controversial activities (Negative Screen) or overweight investments in companies that outperform other companies in terms of ESG (Positive Screen & Restricted Screen).
Growth of Global Sustainable Investing Assets
At the start of 2018, global sustainable investment reached $30.7 trillion in the five major markets shown in Figure 1, a 34 percent increase in two years.
SNAPSHOT OF GLOBAL SUSTAINABLE INVESTING ASSETS, 2016–2018
Region 2016 2018
Europe $ 12,040 $ 14,075
United States $ 8,723 $ 11,995
Japan $ 474 $ 2,180
Canada $ 1,086 $ 1,699
Australia/New Zealand $ 516 $ 734
TOTAL $ 22,890 $ 30,683
Note: Asset values are expressed in billions of US dollars. All 2016 assets are converted to US dollars at the exchange rates as of year-end 2015. All 2018 assets are converted to US dollars at the exchange rates at the time of reporting.
Source: 2018 Global Sustainable Investment Review
Additionally, according to the Governance and Accountability Institute, as of 2018 86% of the companies in the S&P 500 now incorporate sustainability into their reporting. This compares with just 20% who had reported on sustainability just five years prior – and given the upward trend of such disclosure, along with recent efforts to improve transparency on sustainable performance, this percentage is likely to rise even further.
When investing in a socially responsible way, there are many different flavours. You want to ask yourself, what kind of investor are you when you think about SRI investing, so a great way you can learn more about investing in a socially responsible way is to speak to an advisor or certified financial planner. At Provest Private Clients we have the knowledge and expertise to review how SRI Investing might fit into your overall financial situation.