Although ethical investing as a concept is gaining in popularity, it still only accounts for a small sliver, or 1.2%, of the total funds under management in the industry, according to the latest figures from the UK’s Investment Association (IA).
By contrast, retail investors have pumped more than £23bn into UK authorised funds year-to-date alone, surpassing the annual net retail sales in both 2015 and 2016.
It doesn’t help that many out of the box, ambitious ethical projects have failed to get off the ground or gain much traction.
Just today, Daniel Godfrey announced his post-IA venture, The People’s Trust, had been unable to garner enough support from certain investor groups.
The cruellest irony of all is that his sustainably-motivated passion project came to an end during Good Money Week.
No place like home
When the Wisdom Council asked a group of investors about which aspects of their lives they act the most socially responsible in, respondents were far more likely to say they had a green approach to the running of their household (57%) and child-rearing (42%) than the way they invest (22%).
Juliet Schooling Latter, director of FundCalibre, agrees that there is a clear disconnect between the shifting public narrative about socially responsible and environmentally-friendly living and the way people think about their investment strategies.
“Trump’s tearing up of the climate change agreement and Sports Direct’s poor treatment of employees have both made the headlines in recent months – underlining the fact that environmental and social issues are very much front of mind.
“However, when it comes to our investments, we are a little less vocal.”
Dispelling the myth
One of the biggest misperceptions about the sector, which could be watering down demand, is the fear that ethical funds will struggle to outperform their non-ethical counterparts.
But this fear doesn’t line up with the most recent performance stats, even over longer time horizons of three to five years.
Data from Lipper Investment Management and Moneyfacts confirms that in general ethical funds have had a competitive edge over non-ethical funds, returning 16.81% over the last 12 months compared with the latter’s 15.2%.
These figures should reassure investors that “you don’t need to sacrifice returns for your principles,” says Schooling Latter, who lists EdentreeAmityUK, the Rathbone Ethical Bond fund and Standard Life Investments UK Ethical fund as three standouts deserving of a higher profile.
Seven Investment Management senior manager Camilla Ritchie also disagrees that sustainable investing will end up being a drag on returns.
“Sustainable investing can actually improve returns and reduce risk, potentially protecting your portfolio from some nasty shocks,” she points out.
“For instance in May 2015, Volkswagen fell out of the MSCI ACWI ESG Index – an index which screens for environmental, social and governance factors – over governance concerns. Months later, diesel emission test results were exposed as being rigged and the share price plunged.”
While Ritchie acknowledges “this is an extreme example,” she argues that by paying attention to a company’s environmental, social or governance contributions, future pitfalls and financial pain can be avoided.
“It is reasonable to suggest that a firm that produces high levels of emissions during a manufacturing process may be exposed to potential future legislation, such as a carbon tax. Or a firm that treats its employees poorly may face a backlash from its consumers and see its sales plummet.”
Another hurdle for prospective ethical investors is the amount of misinformation that abounds.
Part of that is down to the complicated, technical jargon, which confounds rather than inspires clients. But there is also a failure to distinguish between products and ethical styles.
The fact that all ethical investors have different viewpoints on what is ethical and what isn’t has a tendency to culminate in ethical grey areas, which means investors might not be invested in a strategy that they would deem ethically strict enough.
This phenomenon, also known as green-washing, remains a big problem for investors who are genuinely looking for green alternatives, says manager of the Rathbones Ethical Bond Fund Bryn Jones.
“Some companies might put money into airports on the basis that they create infrastructure and jobs where we would say that airports create a lot of pollution,” he notes.
“A pharmaceutical company can issue a green bond and say they are going to clean up the environment, but they might be doing animal testing inside the business.
“And very large companies that have got a massive ability to distribute could create very, very large funds. You have to argue – do they all end up back in the large caps if they’re equities or in the very large bond issuances?”