“Make your portfolio reflect your best vision for the future. Always be thinking ahead. Be optimistic. Think about the world you want to create, because sure enough your euros and mine, our capital, is helping shape the world. ” David Garder, co founder, the Motley Fool.
You’re not alone, there is a growing tend to invest for the better. Investors are starting to have more of a conscience when it comes to investing their money. Shareholders are applying pressure by starting to only invest in companies that have a ‘greater good’ approach to their business and to not only be interested in generating a profit.
When did this start?
Over the course of many decades many management teams and investors have followed the basic shareholder value theory, which was initially promoted by Milton Friedman. Friedman argued that companies only social responsibility is to maximise shareholder value. (make money for folks holding stock). However, pursuing profit at all costs can be dangerous if it’s at the detriment to the environment, employees, or key stakeholders. Indeed socially responsible investing can go back decades. Religious beliefs are a common thread when it comes to socially responsible investing. In Islamic Finance, compliant investing means avoiding investments that aren’t related to activities promoted by Islam. It can also be dated as far back as 1758 when the Quakers outlawed it’s members from investing in the slave trade.
Different types of Socially Responsible Investing
Ethical Investing
This type of investment excludes certain investments based on moral or ethical values. This type of investment would exclude alcohol, gambling, tobacco, weapons, or adult content. Ethical investing avoids companies that have a negative impact on society. They call this negative screening. Paddy Power (Flutter) and Diageo wouldn’t be be part of a portfolio in an Ethical Investment.
Sustainable Investing
Sustainable investing selects companies that have a positive impact on the world. This may include green technology or social initiatives in developing regions. This is less restrictive as an investment, as the view is companies are not all good or bad, so it may invest in oil companies that invest in clean energy, as an example.
Impact Investing
This type of investing invests in companies which through their practice, products or service create a positive impact. This might be to tackle global, social or environmental challenges. Impact Investments must measure and report their social and environmental performance, or the the non-financial impact they have. Examples may include generating a specific amount of recycling or saving a certain amount of water.
ESG Investing
Another type of investing that has caught on is ESG Investing. ESG is an acronym for Environmental Social Governance. This refers to a company’s commitment to do more than make a profit. Some Fund managers use an ESG rating system to decide whether to invest in a company.
E is for Environmental
This measures the environmental impact a company might have on the world
S is for Social
This measures the social impact which consists of people related elements; company culture, issues that effect employees, relationship with customers and suppliers.
G is for Corporate Governance
This assesses how the corporate management board relates to its stakeholders and how the business is run
Two funds that growing in popularity in Ireland, and also two that I like are:
The Green Effects Fund through Cantor Fitzgerald
The Green Effects fund was launched in Ireland to offer a cost-efficient fund that invests in a basket of ethically screened global stocks. It invests in 30 stocks across Europe, North America, and Asia. It invests predominantly in the following sectors: wind energy, recycling, waste management, forestry, and water related businesses.
Year to date performance (Jan – Dec 1st 2020) +34.1% (not including fees)
The Global Impact Fund through Standard Life
This is a global equity fund that aims to achieve capital growth by investing in 30-60 companies which aim to create positive measurable environmental or social impacts. Typical industries include; healthcare, education, agriculture, and energy
Performance (Jan -1st October) +7.6% (not including fees)
It is estimated that the total value of socially responsible investments worldwide to be in the region of $23 trillion. Europe has accounted for 50% of the World’s socially responsible investing. Existing Investments and interest levels are higher for women than men and are greater for millennials compared to other generations.
In my view there doesn’t appear to be a clear ranking system for socially responsible investments in Ireland to enable the consumer to choose easily. A way of ranking funds using the ESG rating is being used, but in many instances the internal fund manager ranks the fund using their process. More independence is need to be able to rank using the same approach throughout the industry. However this will develop over time, and more transparency will be provided as the demand is there. As a personal preference I would prefer an Impact fund or Ethical Fund such as the Green Effects fund, where there is clear visibility in what they’re trying to do, investing in companies that are using Green Technology which has an impact on improving the World’s environment, and they’re making a profit.