The Evolution of Ethical Investing

Ethical investing is becoming mainstream and more accessible to people who care about where their money is invested.

It is now much easier to find ethical and sustainable funds that are suitable for pensions, ISAs and other regulated investments, but it hasn’t always been this way.

Early forms of ethical investing were limited and only available to wealthy investors who could pay fund managers to pick and choose stocks and create bespoke portfolios.

Portfolios were typically created by just excluding certain types of business such as tobacco, weapons, and fossil fuels and the number of companies available to invest in, that were involved in solving environmental problems, was limited.

There was less demand for ethical investing because people were not aware of the devastating impact human activity was having on the planet.

Times have changed.

Climate change, CO2 emissions and our impact on the environment are all hot topics constantly in the media and the science is telling us we must act now to protect our world.

More people are aware of the problems that lie ahead so ethical investing is evolving as a result of both increased consumer demand, and the need to make major changes to the way the world produces energy, transports goods, and builds infrastructure.

Since 2013, companies listed on stock exchanges have been required to report on their greenhouse gas emissions and in 2019 legislation was introduced that requires UK pension schemes to set out their policy on Environmental, Social and Governance (ESG) considerations in their investment decision making.

With more than £1.5 Trillion invested in UK occupational pension schemes alone, companies seeking access to investment now provide detailed information about their environmental impact, including data on water use, air pollution, waste, and biodiversity.

All this information makes it easier for investment managers to select greener and more sustainable companies to invest in.

ESG investing is a ‘screening’ method that takes this information and uses it to select companies based on their environmental impact, use of labour and management ethics.

A good ESG fund will aim to only include companies with high ESG scores and a wide number of ESG funds and portfolios now exist that are available from many well-known providers.

ESG screening rewards existing business for their approach to sustainability, treatment of people and quality of management but does not automatically exclude unwanted sectors so some ESG funds will still have exposure to controversial industries like fossil fuels and weapons.

Fund managers taking a more ethical stance will include high ESG scoring companies and will also seek to exclude businesses and sectors that have a negative impact on society and the planet and include businesses that have a positive social or environmental impact.

Excluding businesses that have a negative impact as well as including businesses with a positive impact is often referred to as Socially Responsible Investing (SRI).

Socially Responsible Investing is the predecessor to ESG investing and came before detailed information was available that made ESG screening possible. The two methods are often used in conjunction to create ethical portfolios with a more positive impact.

Many SRI funds exist and in 2018 over 25% of all funds under professional management in the United States was invested using SRI strategies and the demand continues to grow.

ESG & SRI funds and investments make up the majority of ethical offerings but for some people they don’t go far enough.

Impact Investing is now growing in popularity for savers and investors who want to have an even greater positive impact with their money.

Impact investing aims to only invest in businesses that are solving global problems and have a positive impact on society and the planet.

This is similar to early forms of ethical investing but now the number of potential companies to invest in has increased dramatically as counties around the world strive to create more sustainable economies.

Impact investing is not limited to renewable energy or electric cars and includes them alongside large multi-national organisations developing better insulation for buildings (to reduce energy consumption) or companies making efficient air-conditioning units that produce less heat as they operate.

Impact investing can also follow certain themes like food production, water preservation and cyber security, all of which contribute to a safer, more sustainable future.

ESG, SRI and Impact investing options all now exist as regulated investment products that provide investors with an additional level of protection and can be used to create ethical pensions, ISAs or be held in a variety of other regulated investment ‘wrappers’.