Ethical investing is still seen by many as an approach where investors must sacrifice potential returns to align their investments with their values. But it has evolved in the past three decades, from the adoption of environmental, social and governance (ESG) standards by mainstream fund management to the recent emergence of impact investing.
Whether it is termed ethical, ESG or sustainable investing, the aim is generally the same. It is to make money while making the world a better place and it is a fast-growing market.
Investors ploughed more than £1 billion into ethical funds last year, the highest annual inflow ever recorded, according to figures published by the Investment Association. Funds under management were £15.4 billion at the end of December. It is a small slice of the overall market, but heading in the right direction.
A heightened awareness of climate change is one significant driver, as are corporate scandals such as the Volkswagen diesel emissions episode. These issues irk ethically minded investors.
Historically, ethical investing principally focused on excluding specific companies and sectors, for example tobacco or armaments stocks. Most of those strategies have evolved towards a best-in-class approach, which allows investors to pick companies with the top ESG score in a particular sector.
At EQ Investors (EQ), we meet with fund managers on a daily basis. One things that has struck us in the last five years, is the number of mainstream fund managers embedding ESG analysis into their research process.
The real step change has come with the launch of impact strategies, as investors seek out companies making a positive impact to society and/or the environment. This positive element, combined with the financial return, is attracting more and more investors.
It has been five years since we launched our Positive Impact Portfolios. They have been a great success, both in terms of popularity and performance, among individual investors and IFAs.
Within the sector, there have been several new fund launches in the past 12 months. In some cases EQ is playing a key role in bringing these launches to the UK by positioning the Positive Impact Portfolios as a lead investor.
Since their launch in 2012, the Positive Impact Portfolios have demonstrated you do not need to sacrifice returns when you want to do good. For example our most popular, the balanced risk profile, is up 63.5% from inception (1 September 2012) to 30 January 2018, an annualised gain of 9.5%.
Indeed, the positive impact approach itself favours companies that are trying to do good and run their businesses in a sustainable manner. Such companies avoid fines and other penalties and have stronger relationships with customers, suppliers and employees. Furthermore, they often operate in emerging sectors with high-growth potential.
Damien Lardoux is portfolio manager at EQ Investors