Protesters took to the streets of London this week, in the name of rebellion against governments’ perceived lethargy in the face of climate change. Whether their strategy of bringing areas to a standstill actually achieved anything is doubtful. But for savers who want to bring about change in a more pragmatic way, investing wisely could be the answer.
Impact investing strategies that provide social or green benefits and funds focusing on environmental, social and governance (ESG) concerns, are becoming increasingly popular. Climate change is only a part of what most want to tackle – other problems in the crosshairs include poor health, poverty and discrimination.
The theory is that by targeting investment at companies aiming to do good, or by engaging with firms as a shareholder to improve their practices, more money will flow to the businesses, making the world a better place.
Those which don’t will have to buck up their ideas. Ben Yearsley, director of Shore Financial Planning, says every fund manager he has met over the past year refers to ESG. ‘Most of the focus seems to be on the governance angle,’ he says.
Easy as ESG
Fund managers have become more vocal about problems they see with management. Last year, for example, Aberdeen Standard Investments tore apart housebuilder Persimmon for awarding its chief executive pay of more than £100m. Aberdeen, which owned 2.3pc of Persimmon at the time, deemed the amount disproportionate, saying it brought Persimmon into disrepute.
Legal & General revealed this week that it voted against more than 100 UK company chairmen in 2018 for failing to address concerns on gender diversity. A lack of women on boards and in senior roles is a social and governance concern, it argued. For savers who want to put their money to good use, looking up an investment firm’s ESG processes is a good start. The more a fund pushes its portfolio companies to focus on ESG values, the better.
Just this week, Persimmon tried to clean up its image by appointing a new director to oversee executive pay. But for individual investors who want to take it a step further, and make sure their money never goes to companies which they might morally object to, there are firms which cater to that.
Wealth manager Close Brothers Asset Management is one which has built a range of socially responsible portfolios. They aim to meet expectations on returns and only back responsible business. Nancy Curtin, Close Brothers’ chief investment officer, says the 17 sustainable development goals published by the United Nations form the background to any investment decisions. ‘We group them into four: social empowerment, environmental protection, health and economic advancement,’ she says.
‘If the meat of what a company does is contrary to the goals, we remove it from the portfolio.’ That’s the first aspect – Close Brothers then ranks companies based on the positive impact of their products or services, or how they conduct themselves under ESG criteria.
Tracker funds, which simply mirror an index like the FTSE 100, could seem problematic – if they just follow the index, surely they won’t be able to ignore companies with poor practices?
However, eggheads at giants such as Vanguard and Blackrock have thought of ways around this and created socially responsible investment funds. James Norton, senior investment planner at Vanguard, says it looks at the four broad principles of the UN Global Compact: human rights, labour standards, environmental protection and anti-corruption.
The funds then exclude companies deemed as ‘bad’ under these principles and invest more money in a similar business, so the fund still broadly mirrors the index. ‘If there’s a business we exclude – like HSBC, which we took out on anti-corruption grounds – we cut it from the fund and overweight other global banks,’ Norton explains.
For those taking a strong stance, there are impact specialists like M&G’s Positive Impact Fund. These only invest in businesses which are performing a measurably good purpose while also making a profit for investors. John William Olsen, who runs the fund, thinks there are only around 150 companies in the world which fit his strict criteria.
Does all of this doing-good mean less money at the end of the day for savers? Yearsley thinks it might. ‘The companies you’re invested in will be trying to achieve other goals, and might not be putting profit top of the list,’ he says. Olsen argues this isn’t necessarily true. ‘We only invest in companies where we think there’s a perfect alignment between them making money and having this focus on sustainability and impact,’ he says. ‘It’s not mutually exclusive in any way.’ Most impact funds available to normal savers haven’t yet existed for long enough to test his theory. But investors with a sharp moral compass will be watching closely.