The race against climate change is on, the transition to a more sustainable world has started, and it’s universally acknowledged that big business is where the real change needs to happen. As investors, you can drive this change.

Positive impact, not exclusion

We first launched our ethical model portfolios in 2010: the ethical investment landscape provides a very different picture today. Principles-based investing is still led by an individual’s desire to ensure that their investments are not having a negative impact on humanity and the environment. However, better education and global government collaboration has shifted the focus away from exclusion-based investment and instead into the positive impact companies are making.

Our ethical portfolios now contain investment into sustainable companies that provide a positive impact, and cover specialist themes such as renewable energy.

Screening that previously excluded unethical investments has been replaced with filters that look to attribute scores to companies based on their Environmental, Social and Governance (ESG) impact. Increasingly, investment managers are adopting the United Nation’s 17 Sustainable Development Goals (SDGs) to measure the positive ESG impact of the companies in which they invest.

The 17 SDGs are further broken down into 169 targets with 232 indicators. This provides a universally recognised set of actions which will address the global challenges of poverty, inequality, climate change, environmental degradation, peace and justice by 2030.

Investment opportunity

These sustainable goals are a key consideration when investing today. According to the Organisation for Economic Co-operation and Development (OECD), for the economic recovery following the COVID-19 crisis to be durable and resilient, all economic recovery packages should aim to include alignment to the SDGs’ long-term emission reduction goals, and factor in resilience to climate change and slowing biodiversity loss. This is in addition to the signing of the Paris Climate Agreement by nearly every country in 2015, which aims to limit global warming. Realistically this can only be achieved by reaching net zero carbon emissions by 2050 and then beginning a global decarbonisation programme.

Given the sheer scale of investment that is required to complete all of the UN’s SDGs, we are excited about the investment opportunities that exist within our ethical portfolios.

We are seeing an ever-increasing body of evidence to suggest that ethical investing actually boosts returns rather than hinders them. This, we hope, will remove a previously accepted barrier to ethical investing – the acceptance of lower investment returns.

Although in the short term the continuing global need for carbon-based energy means we would expect our agnostic portfolio offerings to outperform their ethical counterparts, this will likely change over time. We can certainly see a future in which the only companies left to invest in are those with good ESG scores – in this scenario we would only offer an investment solution based on our current ethical portfolios.

Greenwashing

With such a strong investment case many fund managers are keen to capitalise on this investment theme and we are seeing some funds claim to be ESG solutions when in reality the environmental benefit is significantly lower than one might expect. Such is the scale of businesses giving the impression that their products are more environmentally friendly than they really are, a word has been created to describe the process: greenwashing.

With the UN’s SDGs providing a common framework for ESG investing within the financial services industry, the broad range of criteria does bring challenges. It is very possible that an investor can be invested into an ESG certified strategy which has little or no crossover with their own expectations of ESG investing. Each one of us would prioritise the 17 goals differently, let alone the 169 targets within those goals. It is therefore important to understand the construction of ESG funds so that you know which SDG it is targeting and how it hopes to satisfy the criteria.

Please speak to your Financial Planner for more information about our ethical investment solutions.