What would the pioneers of sustainable investing think of progress today? The 1980s were a time when the role of finance in driving unsustainable behaviours was beginning to be understood. The Big Bang of deregulation of the City of London was part of an increasing flow of international capital, seeking higher returns. The logic for markets was simple: maximise returns to the shareholder.
A few pioneers in the USA, UK and across the rest of Europe thought we should harness this wave of capital for good. The way had been shown by the anti-apartheid movement: from protest came action. Which companies and financiers were investing in South Africa and could they be boycotted? The church and civil society groups who led those initial campaigns supported research organisations who were a vital component in the next step. Who was financing clear-felling of rainforests? Who was manufacturing firearms? Who was investing in coal mining and coal power stations? Climate change, after all, has been business planned and financed.
If you wanted to avoid investing in companies doing the stuff that was damaging society and the planet, you could. The very first UK unit trust funds that ordinary investors such as you and I could invest in, the Friends Provident Stewardship Trust, under pioneer of ethical investment Charles Jacob, and the Merlin (now Jupiter) Ecology Fund, under Tessa Tennant, started up and the seeds of responsible finance were sown.
Today, 20 to 30 per cent of the world’s investment assets are invested with a responsible finance lens. The Global Sustainable Investment Alliance 2018 report showed assets at $30.7tn, a 34 per cent increase in two years.
Investors though will be wondering if ethical equals effective. So what’s the future for investments that deliver positive impact?
Responsible investing is done in four main ways. In the beginning, negative screening. Could we avoid the bad stuff? With apartheid, companies with significant operations in South Africa. Latterly, the climate-heavy companies in oil, gas and of course coal. This approach had limits. A good piece of investment performance is not down to your manager, but by how widely spread your portfolio is. The more diversified the better. Over time diversification gives you a return advantage. Limit your portfolio by taking out whole sectors, like fossil fuels, mining, tobacco, the arms industry and you end up with a less diversified portfolio that might perform less well. This concern led to the next strategy, positive or best in class.