What is driving the nice-ification of investment?

Written by Rebecca O'Connor on 28th May 2018

Trends usually start with a small group of cool people doing something that seems a bit odd at first: growing long beards, for example. Then somehow, that odd thing clicks – other less cool people suddenly get the coolness of it, and the trend catches on.

Could this be so with positive investing?

Once the preserve of self-confessed ethical types, this church is now broadening out to include “mainstream” folk, who have been feeling guilty and a bit cross about plastics and car fumes for a while and are beginning to think about what their money is doing in the world.

Of course, positive investing is a “cool” thing to do, by default. But seldom has the investment industry ever been a conduit for coolness, so it’s not at all guaranteed that this particular sustainability vogue could follow the pattern of sustainability trends in other spheres, such as clothing and food and takeover the pinstriped world of investment managers, just by virtue of its coolness.

However, sustainability is much more than a trend – its roots go deep into the need for human preservation. So the nice-ification of investment that is happening isn’t just a fad, either. It is looking more like a permanent feature of the investment world all the time – like (hopefully) organic free range eggs and fair trade chocolate.

The latest figures from the Investment Association (IA) showed record demand for ethical funds. Despite the proportion of total funds that ethical investing accounts for still being piddly, at 1.3%-ish of total funds under management in the UK, the rise was so notable that the IA has set up a special committee to explore the theme of sustainable investing.

Some research from an IW Capital, an investment firm, appears to suggest the trend is set to get bigger.

It found that 24 per cent of investors would now refrain from pursuing an investment decision because of their personal or ethical concerns surrounding the nature of the product or service.

So where is this trend towards the nice-ification of investment coming from?

Here are some of the key drivers of the impact investment trend:

 

  • Young people

Young people will bear the burden of the environmental cock-ups of previous generations, so it’s no surprise that they are more keen on sustainable investing. According to research conducted by Morgan Stanley, 86 percent of millennials—broadly defined as those born between the early 1980s and 2000—say they are interested in socially responsible investing.

Other trends related to the coming of age of millennials include the trend for brand identification – younger people are interested in the brands they buy from and absorb brand stories, so the brand becomes an identifier of the individual.

There’s also a trend for customisation that plays into the growth in interest among young people – millennials want things that are unique to them and say something about them, including, potentially, their investment portfolios.

  • Technophiles

The trend is also partly being driven by the increasing demand for investments in technology – also very cool and also often developed for social or environmental good. Think solar panels, or smart meters, or sharing apps.

Tech-sector breakdown of investment intentions in 2018, according to IW Capital:

60% – Investments that benefit society
59% – Energy tech
58%  – Med-tech
48%  – Fin-tech

 

  • Women

Moxie Future is a US-based investor community for women who want their investments to make a positive difference. A report Moxie recently published found that 83 per cent of women care about where their money is invested, 69 per cent feel a sense of urgency to invest responsibly, and 63 per cent are motivated to be responsible investors.

The findings also suggested the higher the income level and the more financially confident they feel, the more likely women are to be interested in responsible investment and motivated to act.

Another report: ‘Women and wealth: The case for a customised approach’, found that fulfilling personal goals is seen as the most important investment priority by wealthy women (40 per cent), significantly ahead of market outperformance (31 per cent).

Jessica Robinson, founder of Moxie, says: “Increasing numbers of professional women want to make investment decisions that positively influence the world we live in. They seek to do this by channelling money into companies and industries benefitting not only themselves as investors but also creating positive social and environmental change.”

  • Global policy initiatives

While most of us rarely drop things like the UN Sustainable Development Goals (aka UNSDGs) into daily conversation, they are making a big difference behind the scenes, for example, to the way businesses shape their corporate governance strategies, their renewable energy goals and their investment in people, among other things.

The Paris Climate accord also set clear goals for businesses and governments around the world. Many executives are seeing doing the right thing as a marketing opportunity to both investors and customers and this is no bad thing – if they follow through. These policy initiatives are driving change on the supply side – or in human-speak, creating the opportunities for us mere mortals to buy and invest better.

It’s happening on a country specific level, too. Developing countries are skipping out the industrialisation phase and heading straight for energy and technology solutions. India and China, for example, have tough renewable energy use targets.

 

  • Greater transparency

One of the reasons we don’t think so readily about making our money more ethical is that it is less visibly unethical than, say, battery-farmed chickens or McDonalds. We can get our head around the impact of our purchasing decisions as consumers, but where our savings go? It’s harder to imagine.

But greater transparency will change this and is absolutely vital. If you are in doubt about what your investments are doing, that’s because it is being hidden from you (or as good as) that your life-long savings are actually invested in oil, tobacco and sugary drink manufacturers (a typical porfolio certainly would be).

The most virtuous investment funds and wealth managers, on the other hand, are making a virtue of their virtue – confidently displaying the names of the companies they invest in and generally being happy to accept questions from investors about how their money is being used (see our post on the launch of an impact calculator, by WHEB Asset Management). Disclosing things like the top ten holdings in any fund (that’s the 10 companies a fund invests the most in) is a requirement. But you’ll know if a fund is hiding where your money ends up – because it won’t share lots of information about the activities of the companies it invests in.

Boring Money neatly demonstrated why some of the more traditional, less right on fund managers might choose not to go into too much detail. Broken down into a brand logo diagram, you can clearly see that this global equity fund invests in (ie. loads of stuff you wouldn’t want to):

  • Enlightened capitalism

Enlightened self-interest, enlightened capitalism, ethical capitalism… all terms that are entering common business-speak with greater frequency.

There’s a political, economic and cultural ground shift, and a growing acceptance that it is possible to make sustainable profits from sustainable activities. It’s not the capitalism that we are used to, certainly. It’s a more patient type of profit-making, with impact taking an equal place to financial returns in the equation. But it’s still capitalism.

  • Better education (more demand for transparency)

Better education among investors and potential investors more generally is encouraging people to ask more questions of those entrusted with savers’ cash. ShareAction, the campaign group, has a lot of support on the ground from students. 350, the divestment campaign group, is an anti-fossil fuel movement founded in American University campuses.

 

  • Tax-reliefs

Social Investment Tax Relief and Enterprise Investment Tax Relief have a part to play in creating more positive impact in the UK, as they give investors in start-ups who are also taxpayers relief on their investments equal to their tax rate (so 20 per cent for basic rate taxpayers and 40 per cent for higher rate).

Opportunities for investors are few, but growing and while they start off as the preserve of wealthier, sophisticated investors, eventually, these opportunities will trickle through to those with less upfront capital to invest.

Triple Point, an investment manager, launched an ImpactEIS service last week. The Impact EIS’s strategy is to target investments in commercially successful companies that earn a proper market return for investors whilst making a positive social impact.

The Triple Point Impact EIS is raising £10m and offers investors with at least £25,000 to put in a portfolio of between 8 and 12 fast-growing companies across four key sectors – the environment, health, inequality and children and young people. The funds raised will provide scale-up capital for revenue-generating companies, which have the potential to achieve returns of 5-10 times an initial investment.

  • Accessibility

There are more opportunities than ever to match up money with beliefs and values, but it’s not always easy to find them or choose between them. This site is trying to change that. Check out our Good Investment Review for funds that have a positive impact and generate returns, but also look at the Good With Money Directory, as well as Good Egg mark firms, for companies that will make your money as virtuous as you want it to be.

  • Evidence

Last but not least, the growing body of authoritative evidence that being good is good for financial returns, too. Upturning centuries of human understanding that you can only make money if you are greedy and ruthless, are numerous studies showing a positive correlation between positive impact and profit. Here we list the five weightiest.

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