Make a Difference – The Strong Case for Socially Responsible Investing

2020 and 2021, the “Years of the Covid”, have made us all do a bit of navel gazing from time to time.

We’ve reflected on our lifestyles, what we value and the nature of the world in which we live.  For many, the pause in the helter-skelter life of travel, commutes and meetings has seen people draw breath and consider life somewhat philosophically.  Pausing for reflection is new territory for many of us!

With that in mind, it’s not at all surprising that when it comes to financial planning and investing for retirement - and even investing to just make a return - that many of us are now taking more time to consider where our investment monies are ultimately going.

• What types of companies is my pension fund buying?
• Should I take a closer look at the motivations behind how my money is being used?
• Can I invest my money to make a difference in the world?

10 to 15 years ago, it was a rare event for a financial planner to be asked by a client to consider ethical, sustainable or socially responsible investment ideas.  Occasionally, someone would request an ethical fund for their investment bond or their pension – a couple of which were available.  Such investment funds would still invest in the broader stock-market, but just eliminate some outliers in the areas of armaments, tobacco and other questionable areas.

However, it was always seen that such an investment was a sure way to lose out on investment returns!  When presented with that reality, investors often thought – “Lord make me virtuous, but not just yet.”

Today, the world is quite different.  There is a dawning reality that our world needs to improve and people need to be more careful with their actions.  This is evidenced in our daily lives as inclusiveness and environmental awareness are more common, bolstered by increased visibility via social media and championed by the likes of Greta Thunberg. The public mood is changing.

And with this change has come an apparent improvement in the investment case in recent years for socially responsible investments – i.e. one can now unashamedly seek better returns on investment assets, whilst still encouraging positive change with one’s money.

2020 was a strange year in global investment markets.  One of the fastest crashes in the world equity market ever seen during the end of Q1, and one of the fastest rebounds soon after.  What made it particularly interesting for the purposes of this story, however, was that socially responsible investments (now more commonly known as ESG investments) outperformed the standard world equities index.  This is critically important.  Now, it would appear that investing with a social conscience can also deliver a better investment return.

It might not always be the case of course! – But if you might pardon the metaphor overlap, there is some evidence to suggest the sea is changing.  And of course this makes sense, when we stop and think about it.

Ultimately, the success of business globally depends on a planet we can inhabit safely, on a workplace we can operate in safely and on the natural resources we rely on replenishing themselves.  One innately realises that commerce could only go on so long ignoring those things and we wondered how long that might be.

But hitting business where it hurts, in how people invest in those businesses has become a sure fire way to encourage business to pivot and make a change.  If the public shuns the shares of corporations that keep turning a blind eye on ESG issues, or even worse, where they flagrantly disimprove things in this space, management at these companies will take notice.  One step further for investors to start moving capital to those companies that are improving things for the welfare of their employees and the planet.

So investing for good, whether that’s to do with people’s interactions and how they are treated or how we interact with the planet and resources, has now fundamentally changed.  No longer is investing with a conscience confined to eliminating a few bad eggs.  Now the important phrase is Impact Investing – invest your money in a way where you can become a catalyst for change.

When you allocate money to an ESG fund or an Impact fund, as part of your diversified portfolio, you pool your money with other likeminded investors and entrust your fund manager to only invest in companies that are upholding a common and forward thinking set of values.  The common values adhered to by most ESG and Impact funds are led by the UN’s 17 Sustainable Development Goals, building on previous change principles such as the 2005 Principles for Responsible Investing.

Where are we on this journey?  There is no doubt – the global financial crisis in 2008 and the unwinding of that for nearly a decade set this movement back by a number of years.  Whilst 2020 wasn’t really beneficial for anyone, I would argue that the change in pace it brought about for so many, has given this new and important form of investing the shot in the arm it needs.

In an Irish context, we still have only a small number of dedicated investment fund options in the ESG/Impact space – but we are likely to see many more options over the coming 2 years.  At Invesco, we are very much “watching this space” to see how things develop over 2021.  Regulation will force advisors, pension funds and investment providers to place a much larger emphasis on these investment options, leading to a potential overhaul of the investment fund universe as we know it.

Change will be accelerated.  I, for one, am fascinated by this.  I’m delighted by the changes afoot and the current pace of change, giving us great hope for how financial planning can, in our small part, make quite a big difference.

For more information, please contact Eamon at edwyer@invesco.ie or your Invesco consultant. Alternatively, you can contact us via the details below.