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LGT Vestra US

Blog post - Ethically tailored - Mar 2016

Duncan Carmichael-Jack, Partner

 

Ethical investment as a concept is perhaps older than many people think. Although not formally labelled as such, its origins are rooted in mid 18th century religious groups and display the efforts to interpret certain beliefs and align them with economic actions. In the present day, socio and geopolitical issues continue to influence the outlook on ethics and perceptions of right or wrong, and debate continues as to how an individual might best impact the world around them for the better.

When an individual looks to participate in sustainable investment, there are generally two avenues of thought:

  1. Negative screening, often simply known as ‘ethical investment', consists of identifying and eliminating exposure to certain companies or sectors which the investor deems 'unethical'.

  2. Positive screening, also known as 'socially responsible investing' or SRI, is where an investor will look to add exposure to companies and sectors that the investor deems 'ethical'.

There is a considerable amount of cross-over in the terminology used in the industry, and few can agree on rigid definitions, and of course, as is always the case with ethics, one person's definition of 'ethical' may vary greatly from another's.

In recent years there has been growing interest in positive screening and in identifying best-performing and best-in-sector companies. This means that investors are more active in seeking exposure to 'green' investments. Several studies have particularly focussed on the investor base profile that is having an overarching influence on the shift to SRI, the 'Millenial' generation (those born 1980-2000). As Millenials acquire the wealth to influence the investment universe, overall investment philosophy is set to change and investors will be looking to prioritise strong corporate governance and strong environmental and social initiatives over financial performance alone.

How are the ‘investors of tomorrow' best served and where will the momentum for change come from? The promotion of financial know-how and literacy is essential for both professional and retail investors especially as people are looking for financial advice at different life stages. The main influencing factor is undoubtedly the continued rise of technology. Millenials are the ‘first digital natives’ who have the internet in the palm of their hand, giving them unprecedented access to information, on investments, on companies and on trends.

An example of the power of increased global connectivity is the coverage the COP 21 Paris Climate Conference in December. An online play by play narrative was available to all, as were the statistics for different scenarios and the unfolding plot of a hopefully successful trajectory. The event itself marked a turning point for the climate movement in terms of the considerable input of corporations towards an ambitious deal, ensuring that business interests were aligned with the COP 21 aims. Technology will also continue to provide a platform for transparency in the ethical investment sector, whether in environmental data or supply chain mapping.

To me, this represents an important opportunity. There has been, historically, a significant amount of negativity associated with the lack of diversification in ethical investment, due to a fairly limited number of companies or collectives that are screened as positive. Not to mention that this sort of investment has only been available to the UHNWI bracket. However, developing technology is making SRI investment more accessible to all investors. Positive consequences of this will be improved corporate governance, more sustainable industries and less long term detrimental impacts for the generations to come. A greener and cleaner planet is the underlying goal, and it must be the future.