As a stream of ‘sustainable’ fund options continues to flow into the investment market, it can be challenging for advisers and customers alike to establish what a fund labelled as ‘green’, ‘ethical’ or ‘responsible’ actually offers.
Yet with the UK’s ethical investment market reaching a record high, now is the time for the industry to act – not only to ensure that its funds stand up to scrutiny, but also to lead the way in a transition toward a sustainable system that respects our planet’s ecological balance and works for the benefit of all.
The finance industry should not wait for governments and policymakers to force its hand towards sustainable choices. Every investment creates an impact on society, whether it be positive or negative. Therefore, as investors we have the unique power and responsibility to measure and manage that impact toward outcomes we find valuable for both our portfolios and society.
Our planet and society face interconnected challenges. It is not enough to invest in ESG best in class companies that, within their sector, may just be the least damaging. Great pressures on our environment and social infrastructure have stemmed from an economic system measured solely by output and growth. Our system can no longer exclusively pursue economic expansion and financial return.
The sector could look more closely at the environmental and social implications of its investment decisions. Environmental, social and governance (ESG) and exclusion-focused funds, which make up the overwhelming majority of the market’s options, eliminate companies from a broader index using quantitative ESG thresholds, sector-wide screens, or norm-based exclusions to be left with ‘no harm done’ or ‘best in class’ portfolios.
It is encouraging to see that the appetite for this kind of responsible investing through listed equities and bonds is growing and that investors are beginning to look beyond purely short-term results. However, if we are to meet the UN’s Sustainable Development and Paris climate goals, ESG is no longer good enough. The sustainable investment community needs to deepen its accountability and quicken its pace.
It is not enough to invest in ESG best in class companies that, within their sector, may just be the least damaging. We need to call upon fund managers, advisers and investors to not just eliminate the ‘bad guys’, but also to focus first and foremost on including the ‘good guys’. By doing so, we go beyond responsible investing, and really start to invest with impact through listed equities and bonds.
We understand that this change will not happen overnight. Instead it requires simple steps to help change the economic system from an exclusion-based approach towards investing exclusively for positive change. \While the EU continues its important work to develop a classification of activities and assets into ‘sustainable’ and ‘non-sustainable’, we have to consider how we invest in companies that demonstrably make a positive contribution.
Triodos Investment Management, for example, has developed seven ‘Sustainable Transition Themes’, in line with the UN Sustainable Development Goals: prosperous and healthy people, social inclusion and empowerment, sustainable food and agriculture, sustainable mobility and infrastructure, innovation for sustainability, circular economy and renewable resources.
At the same time, strict negative screening can be applied, sifting out any companies that have a harmful impact on people and planet, such as products and services related to arms, fossil fuels, tobacco, gambling and animal testing.
There is no such thing as a neutral investment. For a truly sustainable future, we must invest solely in those companies that actively contribute to a healthy planet and sustainable societies.
Source FT Adviser