The turmoil in financial markets may have given wealth managers more important priorities to think about than ethical investing, but this approach to money management is still very much in the ascendant.
It has been easy for cynics to claim that last year’s big stock market losses meant investors could no longer afford the luxury of “ethical” or “green” investing when better returns might be made by holding stakes in firms producing such naughty things as tobacco.
But however easy a conclusion to arrive at, this is a mistake. What is clear is that while markets slid last year and investors scrambled for safety, they are not giving up on trying to do well by doing good. Last week, this publication was honoured to be able to produce a report in conjunction with Kleinwort Benson and EIRIS – which produces research into environmental, social, governance and ethical performance of companies. And that report, while providing no room for complacency, made it very clear that the investment that is driven by such considerations is here to stay.
The 21-page report, which is the third such document produced by EIRIS on responsible investing (RI), looked this year at how high net worth individuals regarded RI and whether they are prepared to make the efforts necessary to change their asset allocation decisions. The evidence is interesting. For example, more than half of managers surveyed – 55 per cent – said they would not be “very happy” to implement a bespoke RI solution for their clients. This suggests that such tailor-made investment services still have a long way to go and are seen by banks as expensive to provide, as opposed to more generic approaches. Even so, some 55 per cent of wealth managers said they are more likely this year to examine governance and impending regulatory issues in their clients’ portfolios.
But in my opinion, the stand-out finding of the survey was that 90 per cent of survey respondents said RI portfolios have outperformed or at least matched their other portfolios. In a nutshell, ethical investing is not just the moral thing to do, it is also the financially smart thing to do.
Firms in the UK and overseas are certainly not slow to catch onto this. Investment firms operating in this field for some time include F&C, with its range of “Stewardship” funds, for example, or Pictet, the Swiss-based house, or Henderson, to take another firm. According to The Ethical Partnership, a co-operative of UK-based IFAs, there are now about 60 ethical and socially responsible investment funds in the UK. The first such fund was launched by Friends Provident as far back as 1984. And it is reasonable to expect, given the amount of work that private banks are now putting into advising clients about philanthropic efforts, that ethical investment options must be an important option to place on any client’s menu.
But for all the proliferation of such investment vehicles, at a time when HNW clients have seen their portfolios hammered by the credit crunch, proponents of ethical investment must be able to show that this approach puts numbers on the board, and is not just about taking a high moral stance, even though this should not be sneered at.
Conclusive statistical information is not always easy to come by, and there are a number of hurdles to overcome. Take the issue of simple terminology. Is an “ethical” firm one that produces or refrains from producing certain goods and services deemed by fashionable opinion to be harmful or good? (Not everyone, including this author, is entirely of the view that man-made global warming is either as serious as some claim or requires massive change). An ethical firm might be simply one that is honestly and transparently run, for example. And there are different models of ethical investment: some portfolios will screen out firms for falling short of certain standards, while other investments will instead try to change the behaviour of a firm rather than exclude it from the start.
Arguably, other things being equal, an exclusion approach to investing means that the universe of firms that is available for investment is reduced, which increases the concentration of a portfolio and arguably its overall riskiness. And evidence for how well they do is not always particularly conclusive. For example, the Dow Jones Sustainability World Index, which comprises 317 companies from around the world, has fared better than the broader market. It rose by 7.63 per cent over the five years to September this year, compared with a paltry 0.96 per cent gain for the MSCI World Index of developed countries’ equities. In shorter time periods, however, the superiority of ethical investing is not always so apparent.
Perhaps the most honest answer to give is that ethical investing generally does as well as, or if not better, than so-called normal investing but there will be periods when the numbers do not bear this out. Sometimes, the decision of an investor to avoid a sector such as arms or a specific country may prove to be a lucky break if the sectors concerned turn out to be in the doldrums. But this may not always be the case – there are times when, much to the distress of anti-smokers, for example, when tobacco stocks do relatively well because they are seen as a “defensive” stock. (In the US, there is even a fund called the Vice Fund which deliberately targets non-PC sectors such as gambling and alcohol). Ultimately, any would-be ethical investor may have to accept that part of the reward of taking such a stance will not result in more money in the bank account. But then money is not everything, not even in wealth management.