This article is from the latest Good Investment Review, which you can download free here.
We are living in turbulent times. A bit of turbulence is nothing new, but the speed with which change is happening in today’s world can catch businesses and investors off guard if they’re not well prepared.
The quote “It is not the strongest of the species that survives… it is the one most adaptable to change” – often attributed to Charles Darwin – holds true in business as much as it does in the natural world.
Businesses and industries that rely on exploiting the earth’s finite natural resources might make strong gains in the short term. But those that can adapt to change and work to solve our most urgent challenges are best placed to survive and thrive in the long run.
Staying focussed on the long term
A classic definition of responsible (or sustainable) investing, according to Liontrust, is: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.
Research shows we have already overstepped six of our planet’s boundaries. These are: climate change, biodiversity, freshwater availability, land use, nutrient pollution and novel entities (human-made pollution/microplastics and radioactive waste).
Therefore, the global economy will increasingly favour companies that contribute to – and benefit from – a more sustainable future and, just as importantly, are resilient to risk (such as that brought by climate change). This is where the opportunities lie for responsible investors.
It’s no secret that the performance of many responsible funds has struggled recently – after they outperformed their traditional peers on average over a turbulent 2020 and the previous five years, according to the Good Investment Review.
Russia’s war with Ukraine, higher interest rates, soaring energy costs and a subsequent loss in valuation of tech and growth stocks (which responsible funds tend to be invested in), led to a tricky 2022 and 2023.
Interest in sustainable investment is on the rise
But there are now signs of recovery, and data shows that investors looking to do good with their money are not put off by dips in short-term returns – in fact, interest in responsible investment is on the rise.
A recent “Sustainable Signals” report by Morgan Stanley found that 77 per cent of individual investors globally are interested in investing for positive social and/or environmental impact alongside market-rate financial returns.
In addition, 57 per cent say their interest has increased in the last two years, while 54 per cent say they anticipate boosting allocations to sustainable investments in the next year.
This mirrors wider industry sentiment that responsible investing is very much here to stay – far from being a niche interest, sustainability is fast becoming a central consideration for all businesses and investments.
A survey in May by Morgan Stanley found that 85 per cent of companies view sustainability as a way to create value within their long-term corporate strategies. And they’re acting on it, too. An analysis in August of corporate climate actions published in the Harvard Business Review found that nearly three quarters of commitments announced in 2021 had been fully or partially achieved.
These changes don’t come from pure altruism. Companies stated their primary motivations as having to adhere to regulations and fulfil corporate ethical obligations, as well as increased expectations around sustainability from external stakeholders and broader society.
This means that responsible investors who are asking more of the businesses they put money into are making a real difference.
Being responsible also makes financial sense
But investing for good isn’t about making a positive impact on the planet and society at the cost of making a profit. It’s also a logical financial strategy.
Responsible funds look to understand future trends and invest now for long-term growth (and investing should always be for the long term – at least five to 10 years).
After all, global challenges won’t be resolved overnight. New solutions are needed to tackle ESG (environmental, social and governance) issues, while some sectors need time – and investment – to transition towards climate goals or biodiversity targets, or to align with evolving regulation.
Also, by avoiding companies involved in activities that could be subject to regulation, controversy or long-term environmental risks, responsible investors can protect themselves from potential losses.
For example, the fossil fuel sector has faced increasing regulatory pressure as well as consumer boycotts of companies associated with it.
But while responsible investing continues to prove its worth, those looking to make a positive difference with their money are no longer happy with simply being told a fund is ‘green’ or ‘sustainable’ – they want to know it is doing what it says it is.
This issue of greenwashing (where a provider claims its products are more environmentally friendly than they are) is being tackled by the Financial Conduct Authority’s new Sustainable Disclosure Regulations (SDRs).
While this takes time to filter through to investors, it’s important to do careful research and/or choose trusted funds and providers – such as those listed in this Review.
Important information: This article is journalistic and should not be viewed as financial advice. Remember that when you invest, your capital is at risk and the value of investments can go down as well as up.
