Ethical investing: it really is greener on the other side

Ethical investing, specifically through funds with a higher environmental, social and governance rating (ESG), has been a growing trend in recent years. Most of us have heard of the term ‘ESG’, and have a vague idea of what it relates to: companies that respect the environment, their workforce and that of their supply chain, and are run by boards as equal and diverse as the people they employ.

But do these funds actually deliver a better return than those traditional funds that focus on diversification and risk management, no matter their social or environmental impact?

The answer, according to a study by Morningstar Direct, is yes.

Their research compared ethical funds with their closest ‘non-ethical’ fund run by the same investment house and found that five out of six ethical funds outperformed their competitors over a three year period to 31 August 2019.

(Image source: Morningstar Research as of 31 August 2019)

This adds to the evidence that investors don’t need to sacrifice return for the decision to invest ethically, and the trend towards ethical investing is only set to grow. A 2017 Morgan Stanley study found that 86% of millennial investors surveyed said that they are interested in sustainable investing in a collective effort to halt climate change, to put an emphasis on social equality, and to avoid causing any harm to either the environment or to people. That’s not to say all those next generation investors will solely focus on ethical funds, but such a large interest is sure to make companies around the world ‘become greener’ for the sake of being attractive investments in the future.

The move to cleaning up ESG scores has even forced oil companies into action. Shell has been one of the biggest traditional polluters to announce last year that it will “take responsibility, over time, for reducing the net carbon footprint of the fuels it produces, essentially putting itself on the hook for the emissions produced when the company’s customers burn oil and gas in their cars and homes”, as reported by the Financial Times.

With fund managers increasingly highlighting the changing climate as one of the biggest risks they have to manage, groups like Climate Action 100+ and Follow This have emerged with the aim of pushing companies to adapt to more climate friendly goals. 

And with the oldest millennials approaching their 40s and looking set to inherit upwards of $30tn in the coming years, there’s certainly a big shift coming which looks to be in line with the political climate across Europe, with the UK one of many looking to reduce net emissions to zero by 2050.

Over the coming years, companies like Shell are expected to dramatically change their energy mix by developing carbon capture and storage projects, planting and conserving forests to absorb carbon, and encouraging people to drive electric cars.

Of course that doesn’t mean customers will buy into Shell’s new projects: they and similar companies will need effective PR and a fair degree of transparency with the public if they want to succeed in managing the move to a greener future. If they persuade investors that they’re serious about committing to better ESG scores, however, then they will be rewarded. The grass really will be greener on the other side.

Events like the COVID-19 pandemic will continue to challenge and put strain on companies, and on their efforts to keep up with political commitments to a less polluted future. When the world recovers, these companies need to make sure they have a competitive edge. If you would like to know more about ethical investing, don’t hesitate to contact your adviser.