Why responsible investing is more important than ever

Written by Lori Campbell on 17th Oct 2022

This article is from The Good Investment Review, October 2022, which is available to download for free here.

Responsible investing became a bright beacon during the pandemic, as people paid more attention to the health of the planet and society and their own financial future.

However, with inflation on an upward spiral and stock markets on something of a rollercoaster ride, the notion of investing for good while also making a personal profit now appears less straightforward.

The performance of many responsible investing funds has struggled recently – after having outperformed traditional funds on average over a turbulent 2020 and the previous five years, according to the Good Investment Review.

The reasons for this actually have nothing to do with their responsible badge (the ‘theme’ of investment) and everything to do with asset class, geography, company size and type of investment.

Most responsible funds avoid investing in destructive industries and practices such as tobacco, alcohol, gambling, fossil fuels and defence. Instead, they tend to be heavily weighted towards technology and digital stocks.

These have fared less well recently because much of their value is based on predicted future earnings, which are quickly eroded when prices now are rising.

Working on solutions to the world’s problems

Positive impact funds that actively seek out companies working on solutions to the world’s most pressing problems, like climate change, often invest in pioneering technologies and on ideas and systems that will take time to really thrive. After all, reversing the damage done to the planet and building a more sustainable world is a work in progress.

Again, the worth of these companies on the stock market is highly sensitive to inflation and interest rate rises.

Meanwhile, Russia’s war with Ukraine means that pretty much the only stocks doing well currently are in very non-sustainable areas such as oil and gas, commodities such as precious metals, and arms.

It might be tempting at times like this to push your ethical principles aside and take a more hard-nosed, profit-first approach to your money. Or to panic and revert to cash savings accounts, which really will crystallise any losses you’ve made.

Investing is always for the longer term

Remember that investing should always be for the longer term – five to 10 years at least. This means that your money stays locked away whether markets are high or low. Responsible investing, like all sectors, will suffer some storms along the way.

While returns are never guaranteed, the old adage, “it’s not about timing the market, but about time in the market,” has been proven true over the years – history shows that the stock market is one of the only sectors to have consistently grown more than inflation.

Focusing on the wider horizon, and what responsible funds are designed to do (create lasting and important change for the better) should provide comfort if your portfolio is experiencing some financial losses right now.

If, for example, you believe strongly that renewable energy has to inevitably take over from fossil fuels in the future, then you’ll feel that any declines in value now will be nothing compared to what fossil fuel companies face in the coming years.

It also makes sense that companies with solid ESG (environmental, social and governance) practices, who treat their customers and staff well, and are genuinely aligned with net zero goals, will be best placed to perform well financially in the long run.

The health of the planet, and of future generations living on it, are dependent on the investment choices we make now. The cost of doing anything other than investing sustainably is huge.

So while there are current challenges for responsible investing, the longer-term direction of travel is unchanged. In fact, it is more important now than ever.

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