Why investing can be more than just money

For a significant number of investors, investing in shares and funds can feel like a dance with the devil as they have to compromise personal values to achieve a return. With the growing awareness of the environmental impact of modern life, interest in ethical and environmental funds is increasing, and you can get a good return on your investment without troubling your conscience.

There has been a substantial increase in interest in this area, and accompanying press coverage, in the past year but there has also been a lot of ‘jumping on a band wagon’ and there is more to this kind of investing than picking a fund with a name that seems to fit.

In this article I aim to give you an overview of what these funds are, why cryptocurrencies do not fit in this sector, and how you can invest and feel good about it.

Many people will avoid buying from certain companies, or will make ethical consumer choices, so it is only logical to extend this to how you invest your money.

These days, the funds that we previously described as ethical or ecological, or even as just ‘green’, all come under the umbrella term of Socially Responsible Investment (SRI) and there are myriad choices, so if you would like to invest without compromising your personal beliefs this could be of interest to you.

The history

Socially responsible investment funds have been available for more than 30 years and this is a growing investment sector with the first fund launched in 1984, by UK insurer Friends Provident with its Stewardship Growth Fund. The fund had the radical strategy of excluding companies that did not meet its specified ethical standards, such as those involved in tobacco, gambling, pornography and the military, while also trying to invest in enterprises that made a positive contribution to society.

At the time, cynical traders in the City of London dubbed it the ‘Brazil fund’, because they thought anybody who invested in it must be nuts! Time has proven them to be wrong.

This fund still survives although it is now run by another company and has a different name but it was the precursor of what is now a significant investment sector. Whilst individuals have invested with an ethical bias earlier than the launch of investment funds, this was the start of retail investing in this way.

In the US, this market sector is known by the acronym ESG, for environmental, social and corporate governance. ESGs and SRIs are not the same as Sharia compliant investment funds but there are certain similarities.

Such funds usually screen out companies that invest in areas such as armaments, tobacco or alcohol, and others seek out companies that make a positive contribution to the environment.

Do they work?

A resounding yes.

Due to the reduced number of investment options, some funds can have a higher level of risk than the average retail fund, but the evidence shows that there are many well performing investment funds. We now have a number of lower risk funds in this sector so you don’t need to take risks if you don’t want to. There are funds that stand up well to the more mainstream funds and I will often select SRI funds on performance alone.

Investing in line with your conscience does not have to mean compromising your beliefs and sacrificing investment returns. The options are there, even for those who want simply to include some of these funds in a portfolio. It is an area that is much overlooked in the offshore markets, and here in the UAE, but I have always offered the approach, if required.

Investing in ethical and environmental funds is not about making sacrifices for your principles, but instead, is about enlightened self-interest.

Negative criteria

Initially funds were simply about excluding certain sectors and companies with the most commonly excluded companies being those involved in:

  • Armaments
  • Tobacco
  • Gambling
  • Alcohol
  • Pornography
  • Damage to the environment

Positive criteria

Conversely there are various positive traits and actions from companies that can lead to inclusion. These include:

  • Good board diversity
  • Positive environmental impact, locally and/or globally such as clean energy
  • Good consumer protection
  • Positive corporate governance
  • Recycling
  • Sustainable practices

Be aware however, that not all fund managers offer an ethical or ecological fund and many banks are linked to a single insurance company with limited investment options.

How large is this sector?

It is difficult to ascertain the actual size of this investment sector, as funds cross markets, but recent figures show that the SRI market in the UK alone was in excess of £33 billion as of October 2020. When I last wrote about this topic, in February 2018, I quoted figures from December 2016, at which time the UK SRI market stood at £16 billion.

Some sources suggest that globally, this sector is worth in excess of $40 trillion.

If this is of interest to you, you will be in good company and this is no longer a subsidiary for the few. Even huge pension funds are on board with investing their members’ money in this way and fund managers and stock owners are increasingly encouraging companies to take a principled and honourable approach to business.

It is clear that the SRI/ESG sector is growing exponentially, especially among the under 45s.

Cryptocurrencies

Digital currencies are much in the press but I want to tell you about why this is an area to be avoided if you want to invest ethically or ecologically. This is a hugely volatile investment so is not suitable for many people due to risk levels but there are other considerations.

You might think that a digital currency, something than only exists online, would be better for the environment than one made of metals, paper and polymers but it is far from being this simple. Bitcoin uses huge amounts of energy each year: more energy than Norway.

In brief, this is due to the way in which cryptocurrencies are ‘mined’. As recently stated in The Times newspaper, “the University of Cambridge Centre for Alternative Finance estimates that bitcoin now uses an average of 130.9 terawatt hours of electricity every year. For comparison, the entire UK uses around 300TWh a year and Norway 124TWh a year.”

The estimation is that a single bitcoin/cryptocurrency transaction has the energy footprint of 100,000 Visa transactions. Digital doesn’t mean it doesn’t have an impact on our planet; far from it. While clean energy is a growth area, the biggest miner of cryptocurrency is China, a country that relies upon coal.

I have additional concerns in respect of the lack of government regulation, or regulation generally, as this leaves individual investors very exposed. Action Fraud, the UK’s national reporting centre for fraud and cybercrime, has suggested that at least £27 million was lost to crypto and forex investment scams in 2018/19 in the UK. That figure was triple the one from the previous year and the expectation is that this has increased in subsequent years. This was in the UK alone so extrapolate that globally and we’re talking about serious losses. And potential future losses.

Sustainable investment is our focus in this article, and an investment that can triple in value one day, but crash and burn the next, does not qualify as sustainable on any reasonable basis.

What’s the next step

If you consider your purchases, try to cut down on your carbon footprint, reduce plastic use, recycle what you can, and prefer your money to be spend with companies with a conscience, then SRI/ESG investing should appeal to you. At least, for part of your portfolio.

If you have existing investments, they can be managed in line with your views, as well as your risk profile, and I take over the administration of many existing plans to give them the TLC that they need, alongside in-depth professional management.

I have been researching and advising on ethical investments for over 25 years so can assist not only with new investments, but also with rebalancing existing portfolios in line with your personal views. Proper ongoing advice and reviews matter and can make a real difference over time.

Not all advisers are familiar with such funds, and many don’t present it as an option, as it is an area of specialist knowledge.

I offer a range of investment options and for more about flexible investing see this article: The future of investing is… flexible

For advice and assistance on the widest range of personal financial planning issues, with an ethical and professional approach, please contact me to make an appointment at keren@holbornassets.com and see other articles on this website for more useful information.

About FinancialUAE

A qualified and experienced Independent Financial Adviser based in Dubai, UAE. Professional and ethical. Freelance writer on personal financial issues & the On Your Side column in The National. Founder of Facebook group British Expats Dubai. Senior Partner at Holborn Assets LLC, Dubai, UAE.
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