Investors ‘failing to act on climate change’

Financial advisers accused of ‘reluctance’ over sustainability guidance, despite outperformance

Claims come despite a rise in consumers wanting to invest in ethical companies (AP)

The cold power of the Davos summit may have had climate change at its core this month, but investors are still slow to pull their cash from irresponsible businesses, according to a new study into investor sentiment that shows just 4 per cent have altered their financial behaviour in the wake of high-profile environmental campaigning.

Almost nine out of ten UK adults are worried about the environment and a quarter consider sustainability a key priority in their lives, often as a result of the “Blue Planet Effect” or the work of Greta Thunberg, Extinction Rebellion and others.

But only a tiny proportion of UK consumers have altered their investment behaviour to be more focused on socially responsible investing (SRI), taking into account Environmental, Social and Governance (ESG) criteria, as a result.

Research by online investment platform Charles Stanley Direct suggests part of this limited impact may be down to a reluctance of financial advisers and investment managers to spend time talking about the topic.

A third of those who have used a financial adviser or investment manager said that SRI/ESG has never been raised as a topic. A similar third say their adviser has raised the topic on only one occasion.

Rob Morgan, investment analyst at Charles Stanley Direct says: “The amount of coverage that campaigns such as Greta Thunberg’s climate strike have received is hiding the brutal fact that it takes a lot to actually impact behaviour.

“Part of this blame lies at the feet of the financial services industry, but the tide is turning.

“By closing the knowledge gap around SRI, we can help harness the transformative potential of socially responsible investing. This will ensure that investors are able to secure not just a robust financial future, but a society and environment to match.”

But Ian Cornwall, director of regulation for the Personal Investment Management & Financial Advice Association (Pimfa), says advisers are still grappling with the eternal SRI problem of defining what exactly ethical investing means.

“At the moment, good practice is to have a conversation with the client to ascertain their preferences on ESG. This will become an obligation over the next 18 months,” he says.

“But it’s quite tricky because there isn’t yet a common definition of ESG. Firms aren’t just being sluggish.” Significant work is being done to standardise how investment products are labelled but until that work is completed, Cornwall argues the lack of clarity makes such discussions very difficult, not least because investors themselves are often uncertain of their own ESG preferences and definitions.

Missing out

There are different ways to invest ethically, with the principles behind it evolving over time. At first, it was used as a way for companies to avoid being seen as environmentally damaging or unethical, but the view has shifted in recent years to supporting companies that are making positive changes in their behaviour in order to have an impact on our environment and society. This has led to a wave of new funds and definitions being applied to the sector.

In the past, ethical investing was thought of as a lower-return strategy, aimed at people who wanted to put their morals above profits. But now evidence suggests that the opposite is true. Ethical equity indices have beaten their mainstream peers in the UK and US over 1,3,5 and 10 years.

In the 10 years to the end of December 2019, the FTSE4GOOD UK ethical index saw total returns of 126 per cent compared with 118 per cent on the FTSE All Share. In the US, the difference is even more marked, with the FTSE4GOOD US showing 365 per cent total returns over the last decade compared with the S&P 500 at 251 per cent.

“The performance of ethical benchmarks over the last 10 years has been better than non-ethical counterparts,” says Adrian Lowcock, head of personal investing at Willis Owen.

“Much of this has been driven by oil and mining sectors, which have suffered over the last few years amid falls in the oil price, and more recently the tobacco sectors. Many ethical funds have no exposure to these areas and therefore have protected investors from the falls.

“And while the average private investor remains slow on the uptake, professional investors are faster out of the blocks,” he says.

“Whilst the uptake of specific ethical funds remains low for now, there is a significant change in attitude amongst professional investors. The sector has evolved hugely over the past 30 years,” Lowcock adds.

“It is no longer just about avoiding certain types of companies or accepting a lower rate of return because of your morals. The evidence is growing that companies which behave responsibly and incorporate ESG principles into their businesses are better custodians of capital, and in turn provide better long term returns for investors.”

Investors can now choose how they engage with ethical criteria, deciding whether to avoid certain areas of the market, through traditional negative ethical screens, or proactively invest in businesses looking to initiate change.

Other investors’ top priority may still be investment performance, but many understand that how a company behaves will have an impact on the sustainability of the business and its future profits, and this approach is increasingly being catered for as well.

Lowcock suggests starting small – putting as little as five per cent into ESG areas investors are most interested in at first.

Look for funds with a high sustainability rating – those that invest in companies which operate in a sustainable fashion, and fund groups that incorporate ESH into their investment process. Different groups approach this differently but the more a fund group has spent on ESG, the more seriously they take it.

He also suggests looking at options like the Kames Ethical Cautious Managed Fund, which applies a straight ethical filter to its investment process, which is UK-oriented.

The Stewart Investors Worldwide Sustainability Fund invests in global equities and demands positive sustainable engagement from the companies it invests in, or the ASI UK Ethical Equity fund follows a strict process that screens in or out companies and industries depending on their impact on the environment or society.