Significant client opportunities in the new world of ethical investing

The ethical sector is transforming to meet increasing demand for returns with positive social outcomes. Amanda Young, Head of Responsible Investment at Standard Life Investments, explains why this could be a huge opportunity for advisers.

Significant client opportunities in the new world of ethical investing

Increasingly, investors are asking to align their money with their values. In response, the ethical sector has evolved from offering only traditional screening funds to dynamic new funds aiming to deliver both returns and positive social outcomes. But are advisers aware of the significant client opportunities that this compelling sector presents?

Amanda Young, Head of Responsible Investment at Standard Life Investments gives the lowdown on the new world of ethical investing and why it’s appealing to more people than ever before.

Could advisers appeal to clients by offering ethical options?

Yes, I think currently many advisers may be missing a huge opportunity. Some of this is partly down to the adviser community not necessarily knowing about the variety and depth of values-based investment options* now available – there’s been significant change over recent years.

Some advisers may also be missing the genuine and growing consumer interest in values-based investments. A report in FT Adviser earlier this year1 quoted an Aviva survey that showed advisers are significantly underestimating consumers’ interest in ethical issues.

Meanwhile, a YouGov 2016 poll for Good Money Week2 showed just how committed UK investors are to having more ethical options. Of those polled:

  • 63% back a kitemark-style label to identify ethical or sustainable financial products; with millions more likely to invest if a label is created.
  • 69% want a new law requiring financial advisers to ask customers if they’d like to exclude specific sectors or companies.

*An umbrella term used to describe the varied ethical and socially responsible investment types.

Is the ethical sector growing?

Yes, it continues to increase. The European responsible investing fund market has almost doubled since 2010 to €476 billion of assets under management at the end of 20163. And here in the UK, the size of the ethical and green funds market was estimated to be greater than £15 billion4 in 2016.

In fact, the appetite for all things ethical continues to grow. Beyond financial products, The Ethical Consumer Markets Report estimates all ethical spending in the UK to have grown to £38 billion in 2015. This makes the ethical goods and services sector worth almost double the tobacco market in the UK5.

What’s fuelled this growth?

Changes in society and a growing awareness that the companies we invest in have a direct impact on the environment and society are the main factors.

This is particularly true of the millennials – the generation born between the early 1980s and 2000. They have grown up in the shadow of 9/11, have first-hand experience of the rise of access to information through the internet, and have a growing awareness of society’s challenges such as climate change or inequalities. For many millennials, profit isn’t the sole goal. In fact one survey6 highlights that millennials were twice as likely as other investors to invest in companies or funds that target specific social or environmental outcomes.

How much choice do clients have if they ask to invest ethically?

Nowadays there’s a huge range of options for clients who wish to match their investments to their values. These range from traditional ethical funds, which exclude ‘sin sector’ stocks such as alcohol, tobacco and arms companies, through to faith-based options and sustainability-themed funds that address issues like climate change.

And we continue to see investors asking for a variety of options that reflect their own changing attitudes and those of society. Investors have become more sophisticated in their demands, with many moving away from pure negative screening (avoiding certain investments), to more advanced products that include positive selection criteria.

Impact investing is the latest of these, where investments are made in companies or organisations that aim to achieve a measurable positive environmental or social outcome.

But do clients risk sacrificing the potential for returns if they invest ethically?

This is a myth that’s been around for a very long time. It’s absolutely not the case.

As with all investments, it’s important to look at a fund’s performance over the longer term and understand the strategy its investment manager adopts. For instance, the Standard Life Investments UK Ethical Fund has been running for nearly 20 years and has significantly outperformed its benchmark over that period – delivering 237% versus the FTSE® All Share return of 177%*. The fund has achieved this while excluding a significant number of stocks involved in sectors deemed unethical such as tobacco, gambling and armaments.

*Standard Life Investments UK Ethical Retail Fund in GB, bid-bid basis, compared to the FTSE® All Share index total return in GB: from launch 11 March 1998 to 30 June 2017, source: Financial Express.

Past performance is not a guide to the future. As with any investment, the value can go down as well as up. An investor may not get back what they invested.

Of course any fund that excludes large elements of the market place may have performance challenges if those areas of the market outperform over a given period. Therefore, such funds may be more volatile over shorter periods.

Nevertheless, many investors believe that investing in companies that meet sustainability criteria should actually help improve the potential for outperformance. After all, if companies take into account all the risks and impacts of their operations – including human rights, environmental issues and how they manage their employees – their businesses tend to be better managed. In turn, this can help lead to outperformance over the longer term.

And consumers are beginning to hold this view too; in the 2016 YouGov poll I mentioned earlier, 60% of those polled believe in the ability of the financial sector to generate high returns in an ethically and responsible way.

What’s your one piece of advice to an adviser supporting an ethical investor?

Make sure you understand the details of the ethical investment policy attached to your client’s investments. Just because a fund says it’s ethical, doesn’t always mean it is. For instance, our own assessment shows that, at the moment, a large number of funds in the UK market place don’t publish their ethical policy on their websites. Public transparency around how ethics are attached to funds is very limited.

Always aim to understand the policy, how it’s implemented and overseen, and how the fund intends to report its performance against the ethical policy. And remember, ethical policies can vary, so make sure they actually match your client’s goals or values.

How can Good Money Week help advisers?

The Good Money Week campaign helps grow and raise awareness of sustainable, responsible and ethical finance. It helps educate consumers and advisers that everyone has sustainable and ethical options for their money. It also allows all those involved in the ‘good money’ sector to focus their efforts on promoting all things values-based in the investment world. We’re delighted to be a sponsor of such an important event.

You can offer clients a choice of values-based investments

In the past, ethical investing was the only option if clients wanted to invest in companies aligned to their values. But this ‘good money’ sector has moved on a lot in recent years. Standard Life offer a range of values-based investments. You can find out more on the ethical investing page of www.standardlife.co.uk, which also includes client-facing material.

Please remember that the value of an investment can go up or down, and may be worth less than an investor pays in.

Past performance is not a guide to the future. As with any investment, the value can go down as well as up. An investor may not get back what they invested.

The links provided in this blog are for general information purposes only. Standard Life accepts no responsibility for information contained in the sites or for the sites not being available at all times. The information in this blog or any response to comments should not be regarded as financial advice.

1 FT Adviser, 6 February 2017, Ethical Investment demand outstrips adviser interest, Fernyhough J.

2 Good Money Week research was conducted by YouGov. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2171 adults. Fieldwork was undertaken between 17-18 October 2016. The survey was carried out online. The figures have been weighted and are representative of all GB adults.

3 KPMG April 2017, European responsible investing fund market 2016 statistics

4 Vigeo Eiris 2016 UK & Europe Retail Funds Estimate

5 Ethical Consumer Markets Report 2016

6 Morgan Stanley: Institute for Sustainable Investing, Sustainable Signals: The Individual Investor Perspective, February 2015

Amanda Young

Amanda Young, Head of Responsible Investment at Standard Life Investments

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