Can greed be good and green? (Sustainability investing)

There is a an interesting conundrum at play with regard to Sustainability Investing  (aka Ethical, Green, etc).

The opportunity to support good deeds while realising a return on one’s investments would seem to be an attractive proposition. The means exist to invest ethically; there are many well-advertised opportunities to make ethical, sustainability investments. But the practice remains uncommon. Investing in sustainability would seem obvious, clearly not.

Does greed conquer all?

Britons are environmentally aware as well as being a charitable lot. Over 60% of Britons contribute directly or sponsor a cause/charity.

Yet research shows that wealthy Britons are lagging behind Chinese and Brazilian millionaires in investing their money ethically. A recent UBS study revealed that less that 20% of British investors have an ethical investment. It shows that British high net worth individuals (HNWIs) – classed as those with more than $1m (£760,000) in investable assets – hold only 1% of their fortunes in sustainability investments. This low figure compares with an average of 39% of HNWIs across the world.

Why the shortfall?

Reasons to be giving

The answer lies in age-old dichotomies: of ethics and economics; the efficacy of giving and the donated monies as well as role of the corporations in society.

Shareholder value

The mantra of shareholder value posits that the only socially responsible action of a  corporation is to maximise shareholder value. Corporate charity is seen as an unjustified diversion of funds. Corporate charity has its benefits for PR but tends not to have a true positive effect beyond. The investment returns associated with Friedman disciplines have historically outperformed others. Some would say greed continues to outweigh good Yet, Friedman-esque doctrine have been challenged and eroded over the decades with a broader remit and inclusion. Sustainability did not necessarily drive profits. 

Socially Responsible Investing

SRI  developed during the 1970s. Its premise has been expressed in various ways but essentially seeks to exclude investments in companies that did not fit predetermined, activist criteria. In short starve or punish companies by withholding capital and investments. It was a throwback to the Quaker notion of excluding sinful companies. Thus, an SRI investor would screen out: tobacco, alcohol and armaments, as well as mining and even energy companies. While investments in SRI type structures have enjoyed improved returns, such baskets have not been able to match other investment classes. 

Impact Investing and Local Community

Other investor with a socially driven agenda have sought to pursue Impact Investing. They seek to support companies whose activities have a greater impact to the environment or community; beyond simple corporate performance. Such investors are willing to accept less than a market rate in the belief that their chosen metric will have  demonstrative benefit.

At a different level there is a parallel initiative in local investing, to supporting local communities and initiatives: such as expoused by the annual Good Money Week 

Experience and learnings over the decades have led to a coalescence of thinking and realisation that a broader more inclusive approach may be more effective. Hence the rise of ESG investing

ESG investing.

The notion is to opt-in and actively invest in those companies and their activities that have a proven positive effect on environmental, social and governance attributes as well as diversity.  Thus, a defence company, with a high ESG profile, could be included in an investment fund; in contrast to being excluded by a SRI-focused one.

This ESG focus has a positive effects to returns. The company, Arabesque, found that S&P 500 companies in the top quintile in terms of ESG attributes outperformed those in the bottom quintile by more than 25% points (during the period 2014-2018. The high-ESG companies' stock prices were less volatile, lower costs of capital and higher quality profitability including high return on invested capital. The returns of ESG structures are approaching market averages.

Also Diversity is another ESG attribute. McKinsey examined data  revealed that companies in the top quartile for gender, racial, or ethnic diversity are more likely to generate financial returns above the national medians for their industry. McKinsey concluded that "diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time."

Several meta studies reveal that the "do well by doing good" premise of corporate responsibility, as proxied by ESG, is consistent with stronger firm performance. This dynamic has seen an explosion in sustainable investing, doubling in the last 7 years. 

The Ethical Return conundrum may have been solved.

Other benefits

Studies show that Millennials consistently show a tendency to crave social responsibility, whether it's in the products they purchase, the organizations they work for, or their investment portfolios. Also, such an improved Ethical Investment profile may be enticing more aware younger investors.

The UBS paper found that younger HNW people are much more likely to invest their money into sustainable investments than their parents. In the UK, HNWIs under-35 allocate four-times as much of their fortunes to sustainable investments as the over-65s. The dynamic is a positive dynamic; of the wealthy people who had committed a proportion of their funds to sustainable investments, 23% said they had been heavily influenced in the decision by their children.

Summary

Thus there are a variety of reasons why Ethical/Sustainable investing may becoming more mainstream as it demonstrates that there is good in green greed.

Whatever your age or conviction, feel free to contact the team at Gate to determine if Ethical/Sustainable investing should be part of your portfolio.