Thu 04 Jun 2020

Investing with a conscience on World Environment Day

Investing in an ethical or environmentally friendly manner has been growing steadily in popularity over the last 40 years.  As an example, the Ethical Investment Research Service* (EIRIS) was set up in 1983 to help charities and churches to research corporate behaviour when making investment decisions.

Every section of modern living seems to come with its own suite of jargon - wanting your investment to "do good" should be relatively simple, but can become a quagmire of acronyms, abbreviations, and labels.  Do you want ESG or SRI? Are you light green or dark green?  How about positive screening, or negative?

Ultimately, the key questions investors ask themselves are typically:

  • Are there any business areas that I fundamentally do not want to support by investing in?  We each have our own views on this, but some typical areas here may be armaments, tobacco, pornography, or gambling.  Yet even this relatively simple question has areas of grey.  Do you filter out a retailer because 0.1% of their sales come from pornography or tobacco?  Is nuclear power an environmental disaster, or a valuable element of fossil-fuel free reliable power production?
  • Do I want to actively support companies that are contributing to making the world a better place?  Perhaps those in the renewable energy market, or working to develop sustainable alternatives to plastics?  What, if any, "impact" will my investment have?
  • Regardless of which business sector a company is in, how does it run itself, and how does it interact with the outside world?  Does it treat its staff well?  Does it take serious issues such as the gender pay gap and the diversity of the board?  Is there any evidence of misconduct in terms of bribery or corruption?

In the past there was a perception that those investing on this basis would have to resign themselves to lower investment returns.  But what we are seeing now is that companies do not get to choose whether to embrace these issues: they are all judged on them.  If a company suffers a scandal due to an act of say pollution or ethical scandal, then there will be consequences in terms of the share price performance.

Ultimately, we are at the point where "bad" companies make bad investments, and we are all obliged to take these factors into account when looking to invest.

A major objective of World Environment Day is to offer a global platform for inspiring positive change.  Investment managers have been responding to this for some time now, broadly characterised as "engagement".  As the representatives of thousands of shareholders, investment managers have the power to drive positive change within companies by insisting that directors take positive steps in all of these areas.

Thankfully, there are solutions available now that allow investors to invest in a manner that can take on all of the above preferences, make a positive contribution to a sustainable future, all whilst maintaining a well-diversified portfolio.

* I was lucky enough to be involved with EIRIS back in 2001, though my main memory is that I got to meet the ebullient David Bellamy who was there as an environmental campaigner.

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