“an investment approach intentionally seeking to create both financial return and positive social impact that is actively measured.”

Michael Drexler and Abigail Noble

ESG is a term we constantly hear when meeting fund managers; it stands for environmental, social and governance, and when these merics are integrated into the investment process offers investors potential long-term performance advantages. The problem is that many fund managers have suddenly become experts overnight.

In this next series of blogs, I want to explore why ESG has become so important and what is the difference between this and Ethical or Sustainable investing.

A changing environment

Millennials (those aged between mid-teens and early 30s) are fast becoming the next group of investors.

The rapid change in technology is very hard for many to keep up with but for millennials it is a way of life. The ability to be fed information instantly means that they are likely to be one of the most educated groups in history. They are also acutely aware of climate change and economic upheaval, which means that they have very different values, priorities and expectations. This in turn will feed into how they (and future generations) will invest over the coming decades.

Examples of the shift in values include:

  • 50% of millennials consider themselves politically unaffiliated
  • 81% have donated money, goods or services to charity
  • 61% of millennials are worried about the state of the world and feel personally responsible for making a difference
  • 45% are more tolerant of races and groups than older generations
  • 50% believe that climate change is real and that humans are to blame

In the 1960s and 1970s there were socially aware groups, but technology is fundamentally changing how millennials behave.

Changing the business environment

Engagement with music as one example, has evolved over decades; from dance halls to radio, vinyl, cassettes and CDs and now streaming via the internet.

Streaming has fundamentally changed music not just in the way we listen but also how we purchase it. On the back of this companies like Spotify have been very successful, and Spotify was only established in 2006. Record stores on the high street are now few and far between.  Virgin Megastores and Our Price no-longer exist, and HMV hangs on by a thread.

It is not just music. We don’t need to own a car, we can car-share or join a car club. Zip-car was founded in 2000 and introduced the concept of only using a car when needed. YoBike was founded in 2017 and is one of a few companies which enables individuals to share bikes through a smartphone app. Other examples include Airbnb (founded in 2008) which has changed the way we engage with accommodation whether for holidays or business trips, Uber (founded in 2009) impacting how people order taxis and Tesla (formed in 2003) shaking up the car market. The list goes on.

Many millennials are more astute in terms of the institutions or businesses they support and are looking at how these conflict with society and the environment. Only recently, there was a debate on whether we could see a situation where BP and Shell became un-investable companies because of the negative environmental impact they have on our society. The conclusion was that there is a growing belief that in 20 years this could come to pass and therefore both companies will potentially have very different ownership to where they are today. 

If we turn to the high street, it is seen that there is poor corporate governance within companies like Sports Direct, Arcadia Group and JD Wetherspoons, then they could find themselves in the same position. In the past, and money was enough to survive but now, company boards know that this is not enough, and poor corporate governance will ultimately destroy a company.

It is important for the investment industry to take on board this changing environment. The ability to access information quickly means that millennials are more interested in investing than ever before. They want to know what they are investing in and being able to find information means that they know what they like, and equally what they don’t.

Adapting the investment world

The “ethical” investment universe remains relatively small in the UK, and there is a perception that choosing this route means compromising on returns. In our next blog we will look to debunk this theory.

However, it is worth just touching on this briefly; the market has moved forward and the reality is that a well-run company with a focus on positive enhancement of the environment around them is likely to do better than a poorly run company without this. Equally if you have a company that cares for its customers and staff this will potentially give them a competitive advantage.

However, it is not easy to find investments, and what they aiming to achieve. There are different options which include:

  • Ethical funds which exclude companies that might be involved in, for example, tobacco, arms, gambling or poor sustainability practices
  • Socially responsible investment funds which avoid companies with poor sustainability management practices, and certain sectors such as controversial weapons
  • Thematic funds which invest in specific sectors, such as renewables
  • Impact investing which involves investing in companies whose activities have a meaningful positive impression on the environment and society as a whole

Added to the mix are ESG Funds which try to place a framework over the way managers approach investment opportunities.  

The challenge is that some companies are new to the game, and there is no defined name for the different types of funds. As indicated, it is harder to find these investments, because they are lumped in with all the different funds in the various sectors, they operate in. So, although there is a demand, a lot more needs to be done. Research and investing needs patience and can be time consuming.

This will likely change as many millennials have a strong inclination towards investing in companies that achieve positive environmental and social outcomes. We can see why the investment world is trying to adapt quickly for a change that is starting to build, because they don’t want to miss out on this market.

So, where next

In the 1990s, investors could choose ethical funds, but the performance was often poor and the choice weak.

Many of these funds are still available, but there has been a shift to sustainable funds, but we think even this is changing. To adapt to a changing demand; investors will be looking for those investments that provide a positive impact on society, whether environmentally or socially (or both).

In the next blog we will expand on what that this means.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.