As we enter a new decade, the environmental impact of the way we live is in sharp focus. As a result, more investors are considering the construction of their portfolio, to see whether it aligns with their core values in respect of the environment and social responsibility. According to the Global Sustainable Investment Alliance, as at the end of 2018, over $30tn was invested globally in responsible investment strategies, a significant jump of 34% over a period of two years.
In this article, we look at the increasing popularity of SRI investment, ways to access portfolios designed to meet SRI criteria, and whether these portfolios can deliver strong returns for investors.
SRI investing aims to invest money in companies and funds that have positive social impacts. Each investment fund with a stated SRI objective will set out its own criteria as to how investment positions are selected; however, most SRI investment funds will automatically exclude investment in companies involved in tobacco, alcohol, and gambling, and will often also exclude companies whose activities are in fossil fuels, weaponry, and animal testing.
SRI managers can select investments via a negative or positive screening method. The former seeks to eliminate those companies engaged in activities listed above, whilst the latter may include a company where the board is gender-diverse or is making strides towards improving its environmental impact. As a result, positive screening tends to allow a wide range of companies from which the manager can construct a portfolio but potentially may carry investments that sit outside of an individual’s ethical preference. These screening methods are sometimes referred to as ‘light’ or ‘dark’ green, to signify the strictness of the criteria used.
SRI investments are often spoken about at the same time as ESG investing. ESG stands for Environmental, Social and Governance, and ESG investment strategies will consider the impact of these three key areas – the environmental impact of a company’s operations, social risks (such as health and safety and human rights), and standards in the way companies are run.
Where ESG and SRI differ is that a company which has a positive ESG score, and therefore may be included in a fund using ESG criteria, could be involved in an area that is precluded from SRI investment as being unethical, for example, a company involved in fossil fuels may pass ESG filters, but not be considered for SRI investment.
The first UK investment funds with a mandate to invest in a responsible manner were launched in the 1980s. Early adoption of this investment strategy posed significant issues, in that fund managers were selecting from a very small pool of investments that met the necessary criteria. As a result, performance from SRI funds has, historically, fallen behind more traditional investment management without SRI filters, and investors that chose to invest ‘ethically’ had to make a decision whether their core beliefs justified the potential for underperformance over the longer term.
With an increasing number of companies now meeting SRI criteria, fund managers of SRI portfolios now have a much wider range from which to construct portfolios, and the gap in performance between traditional investment portfolios and constructed SRI portfolios has now narrowed significantly. Indeed, over the last year, we have found that SRI portfolios have outperformed traditional investment strategies, and we feel this is a result of a combination of two factors.
Firstly, many companies are themselves gravitating towards social responsibility, and therefore the range of companies available for investment within an SRI orientated fund has increased. With a greater number of companies that pass the screening methods, active fund managers can select from an increased range, which can lead to better outcomes. Secondly, many traditional industries that SRI funds would avoid, such as gambling and fossil fuels, have struggled over the course of last year, whereas technology and pharmaceuticals, which generally pass SRI filters, have outperformed.
It is clear from the trends we are seeing that SRI investing is here to stay. Recent analysis shows that one dollar in every four dollars invested in the US is made into SRI or ESG funds.
Given that many companies now issue their own sustainability report, it is likely that those companies that do not embrace SRI issues and take them seriously may find themselves cast adrift, not only from investors but also from doing business with companies who take their responsibility seriously and do not wish to tarnish their reputation. As a result, we expect to see more companies striving to meet sustainability targets.
In addition to actively managed SRI funds, passive investment options have also emerged over recent years, offering access to Global Index funds that meet SRI criteria. This offers a low-cost way of investing in Global Equities, and an increasing range of Ethical Bond funds now provide the opportunities for Fixed Interest investors to gain access to good performing funds that only lend to those companies who meet SRI criteria.
Finally, younger generations, who are generally more conscious of ethical investment themes, will enter the investment world through pensions and other long-term investment plans. We feel this will increase the demand for SRI compliant portfolios.
We have devised two discretionary managed investment portfolios that meet SRI criteria. Since launch, these have proved popular, and provide access to global investment markets by selecting investment funds that both pass our standard in-house analysis, but also meet necessary SRI criteria.
If you would like to discuss SRI investing or would prefer an existing investment portfolio managed elsewhere to be managed in a responsible manner, then please get in touch, here.
This content is for information purposes only. It does not constitute investment advice or financial advice.