Will 2019 be remembered as the year the world finally woke up to the climate crisis? Only time will tell. One thing which cannot be denied, though, is that awareness of environmental issues is growing, and people are looking to make changes, which must be a good thing.
2019 was undoubtedly a year in which there has been a lot of discussion and development in the investment community around how investors can participate in the risk and reward offered by capital markets, but also how this can be done in a way which is not at the expense of others or the planet.
Our investment committee have enjoyed these discussions over the last 12 months and specifically at the recent Impact Investment Academy conference, which brought together those companies looking to lead the way in this exciting area.
We know this is on the mind of some of our clients, so I thought it worth sharing our take on what we have learned so far from our perspective of being evidence-based investors:
A link between sustainability and successful investing?
Historically it has been a widely held view that those who invested in ‘ethical’ funds have to compromise on returns and risk in order to have their portfolio better represent their values. This year, however, there has been talk of emerging evidence suggesting that this is not necessarily the case.
It seems to make sense to us that those businesses set up to operate in a sustainable way will be the most successful in the long term. Just think about that for a second though; if sustainable companies are the ones which will do the best, will we not end up with a naturally sustainable portfolio by simply letting nature take its course? In which case, why the need for special sustainable funds at all?
It is interesting to observe that the specialist evidence-based investment houses are not shouting loudly about sustainability being an identifiable factor in driving higher portfolio returns. At least not yet anyway…
Still a lack of funds
There have been ‘ethical’ type funds available for some years, particularly for those who only want to invest in equities. However, it has only been in much more recent times that we have seen stronger development of products coming from those looking to have a scientific approach rather than just actively managed funds.
At the moment, we cannot get comfortable with the funds being offered to occupy the risk dampening role of bonds in a portfolio. Those we have reviewed have been found to be just too concentrated for one reason or another. It is an unacceptable compromise for us with respect to diversification, which is a crucial pillar of our evidence-based approach.
The rise of impact ‘investing’
Impact investment funds put your money to use in a constructive way by targeting initiatives to make a positive difference rather than by weeding out or underweighting those companies deemed to be unsustainable or irresponsible in some way.
These funds are actively managed and by their nature concentrated and high risk. While they may prove to be a force for good, they do not have a place in a portfolio which is the core engine on which your financial plan relies. While we applaud what these funds aim to achieve, they should be approached by investors with eyes wide open to the risks.
Compromise is going to be key
The differing approaches the investment fund providers have used to tackle demand is mirrored in people’s differing views on what is important in their portfolio and what they will and won’t be prepared to invest in when prompted.
One may be opposed to investing in arms companies, but what if you learned that they were a leading light in gender pay equality or appointing female board members? Fossil fuel companies may be a red line for some, but what if they were also the biggest investors in the development of renewable sources of energy?
The point is that no two investors share exactly the same view. It means the designers of funds have an impossible task of pleasing everyone. To take a step towards more sustainable portfolios, compromise will be unavoidable. It will be up to us to explain what those compromises are from both a value and a portfolio perspective so that investors can choose the route which best reflects their values.
The future is bright
Development of products by fund providers continues apace. We anticipate the launch of several funds this year, which will offer a true step forward for evidence-based investors looking to construct portfolios from the perspective of an environmental or socially responsible stance. We would love to have our cake and eat it. For our clients to have portfolios which offer the best chances of investment success (without damaging the planet or harming others) would be the panacea, and we will continue to search for it.
However, we will not change our view that investing is a science and not an art form, and for us, the evidence barrier is high for a good reason. Our investment philosophy will continue to guide us, and there are some things the evidence shows us that we should not compromise on.
While we tend to shy away from predictions when it comes to investing, I am prepared to wager that it will not be long before we are able to construct portfolios which are both sympathetic to our investment beliefs and our responsibilities to each other and our planet. We will be having lots more of these conversations with our clients on this subject soon.