The phrase sustainable investing, along with ethical investing has been gaily proclaimed for many years now and it is well documented how the younger generations, ie Generation Z, (born 1997-2012/15) are focusing far more on climate matters and voraciously defending our environment, not just within our lifetimes, but for future generations.
It’s no surprise then, that if the financial services world is to attract both younger investors and those who may be older, but who are still driven to support these causes, then more funds need to demonstrate they originate from ethical backgrounds. But…..how is this regulated?
If we turn the clocks back, many investors have been seeking out positive investments for some time, ie the Lever family (the family behind Unilever) who were choosing companies to invest in based on social grounds almost half a century ago. The most common method was to reject any investments that did not resonate with an investor’s values, ie tobacco companies or those with links to the arms trade.
In today’s world sustainable investing assets have risen 34% from 2016 to 2018 to over $30 million globally with strong performances over the last 12 months. The percentage of ESG (environmental, social and corporate governance) funds held by investors, whilst still small, has doubled within 3 years, and one could argue that this is a positive step forward in encouraging people to invest responsibly. But, there is a caveat – not all these funds are quite what they seem, without a clear, regulated process to define what exactly the parameters are for true sustainable funds.
We can all cite examples of being tempted by clever marketing and it appears that when you delve a little deeper, some favourable sustainability ratings awarded to individual listed companies are in fact operating within commerce such as gambling and alcohol manufacture, traditionally not industries adopted by ethical investors. One piece of research recently likened this investment area to “the Wild West in terms of lack of transparency, inconsistencies and ineffective rules.”
ESG in itself covers a broad range of issues, ie a company’s environmental impact, how its employees are treated, supplier ethics and diversity at senior levels. Therefore, companies such as Diageo and Heineken are respectively judged at low and medium risk by Sustainalytics, but would not be seen as suitable by many ethical investors. Sustainable funds should consequently be made to reveal all their holdings to investors so they can make informed buying decisions.
Interestingly, it was announced earlier this week that the Financial Conduct Authority (FCA) has created a new ESG role, hiring Sacha Sadan (former Director of Stewardship at Legal & General Investment Management) as director of environment, social and governance. His aim is to develop the FCA’s approach to sustainable finance, both in the UK and globally, and will “lead the development of policy to help ensure the long-term safety and soundness of firms, the proper functioning of markets, and consumer protection.” So are we seeing the pathway to more rigorous control and regulation of sustainable funds?
For Generation Z this can’t come soon enough as they are facing crippling university debts with a desire to focus on eco-friendly investing as they mature. A recent Credit Suisse report indicates that future Gen Z’s predicted ROI (return on investment) from stocks and bonds will be lower than prior generations, with annual returns of just 2% as opposed to 5% on equities and 3.6% on bonds that older generations have realised. Millennials (born between 1981-1994/6) and Gen Z are both slightly less open to higher risk investing so time will tell as to how sustainable funding will develop and impact future generations’ financial planning.