Sustainable investing is still seen by many as a route to virtue rather than returns. But clinging to this outmoded notion could prove financially damaging.
The pandemic has hardened attitudes towards corporate bad behaviour, with errant businesses, such as fast fashion retailer Boohoo, taking a hit to their share price.
Many sustainable funds, whether they strive to bring enlightenment to boardrooms or save the oceans, have outpaced their peers. The Royal London Sustainable Leaders fund, for instance, is one of the top 10 performing UK funds over one, three and five years.
Saving the planet: Many sustainable funds, whether they strive to bring enlightenment to boardrooms or save the oceans, have outpaced their peers
The 44 per cent fall this month in Boohoo shares is proof that valuations, and possibly profits, can be hit if a firm seems to show too little regard for the environment, staff, customers and suppliers.
Boohoo’s alleged links to Leicester sweatshops received more publicity than might previously have been the case because of a new readiness to hold business to higher standards.
Leicester has suffered a renewed lockdown, blamed on the spread of the coronavirus in small workshops, affecting the economy.
Bankers JP Morgan forecast this month that Covid-19 could prove to be a turning point for strategies that consider environmental, social and governance (ESG) performance alongside traditional financial metrics. Socially responsible investing may be about to come into its own.
Investors have already shown a preference for companies that try to make the world better. Even in the spring slump, UK investors continued to back ESG funds, joining a global movement.
David Attenborough and Greta Thunberg are cited as an inspiration. Amazon founder Jeff Bezos, the possessor of a £139billion fortune, is not everyone’s cup of tea, but he is ‘giving back’ through a $10billion earth fund. Blackrock, the world’s largest asset manager, and Goldman Sachs are muscling in; by the end of the year, JP Morgan estimates that £35.2trillion may be in ESG funds worldwide.
Sustainable funds proved resilient in the spring share downturn. Fidelity data indicates that companies with a higher ESG rating fared better during the rout. Another attraction seems to be the more frequent use of the term ESG in preference to ethical, which some find too negative a label. Ethical funds avoid tobacco, gambling and weapons manufacturing, but positivity rather than disapproval is the watchword of the top-performing ESG funds.
Baillie Gifford’s fund is even called Positive Change, which Lee Qian, its manager, thinks can be achieved through stakes in firms like Beyond Meat, the plant-based meat substitute outfit and
Tesla, the electric car giant. Tesla, a £227billion business, proves opinion has moved away from the assumption big business is bad. The new breed of fund managers acknowledge that big players in oil, pharma or other sectors, which might once have been the enemy, can produce solutions to pollution and other challenges.
Indeed, solutions is another sustainable fund buzzword. Mike Fox of Royal London Sustainable Leaders says: ‘We like to own companies that are part of the solution, not the problem, whether it is taking carbon out of the environment, curing cancer, or making healthcare more efficient.’
The fund’s major holding – Astrazeneca – exemplifies this. Since January shares in the pharmaceutical powerhouse surged from 6380p to 8652p yesterday, propelled by its push into oncology treatments and the good results for the Covid-19 vaccine it is developing with Oxford University.
It will not earn profits from this vaccine. But global governments may be more eager to call on it in case of future outbreaks, so its philanthropy may pay off.
Claudia Quiroz of Quilter Cheviot’s Climate Asset funds is on a mission to find solutions to climate change and population shifts. More people will be living in cities, increasing demand for energy and water. Xylem, the fund’s largest holding, specialises in solving the infrastructure problems involved in water supply.
Juliet Schooling Latter, research director at analytics group Fund Calibre, says some funds lobby for better practice. Others are more purist. Interactive Investor’s Ace 30 ethical best buy list grades the funds and investment trusts, based on their stance, hard-line or more flexible. Nowadays, you can choose your own route to virtue.
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