Sustainability continues to move up the political, social and world agenda. As we stay home more, the positive impact on the environment only continues to increase, highlighting the importance of today’s actions on tomorrow’s world.
Similarly, ethical investing is changing the landscape of the investment industry. But there are still challenges to be overcome as this strategy moves into the spotlight.
1. There’s a lack of a clear definition of what constitutes an ethical investment
The term ’ethical’ means something different to each person, and similarly, everyone has different values from one another. So, public perception of how these investments would work in practice also varies.
2. The industry jargon makes it especially confusing for investors
The variety of terms are often interchangeable, but they do not mean the same thing. There is a great deal of overlap, and so investors need to have a good understanding of the range of definitions.
3. There is no standardised reporting method for ESG funds or companies
Different investment managers interpret environmental, social and governance (ESG) data differently, which means the reports are inconsistent and often hard to compare.
In 2019, a Government report recorded that over 60% of the UK public would be more likely to make a sustainable investment if they had evidence that the investment would help protect the planet or lift people out of poverty.
4. There is no single ethical sector
In 2018, there were 78 ethical funds spread across 16 sectors. The range of ethical investment options is still growing. However, it remains limited in comparison to more ‘traditional’ investments.
5. Cautious attitudes
There is currently an attitude-behaviour gap between what people say their concerns are when it comes to investing and how they choose to invest. Obstacles include low levels of awareness, variability in returns and an elusive track record.
Investors are also wary of ‘greenwashing’; the idea that not all investments are as ethical as they may seem. And that’s why it’ important to look beyond the labels to see what’s really going on.
6. UK Green Finance Strategy aims to transform our financial system for a greener future
On 2nd July 2019, the UK launched the Green Finance Strategy to align private sector financial flows with clean, environmentally sustainable and resilient growth. The strategy highlights the role of the financial sector in delivering domestic and global climate and environmental objectives.
7. UK Investment Association sets out to bring greater clarity to ethical investing
On 18th November 2019, the Investment Association launched the Responsible Investment Framework. The framework categorises and provides definitions for, the different components of responsible investment.
8. EU makes positive steps towards the development of an EU Green Bond Standard
The Technical Expert Group (TEG) are developing a framework to help determine what can and what cannot be labelled as ‘green’. In March, they published the Usability guide for the EU Green Bond Standard.
9. EU Taxonomy provides clarity on whether an economic activity is environmentally sustainable
The EU Taxonomy, launched by the TEG on Sustainable Finance, can be used to establish the relative ‘greenness’ of funds based on their contribution to one of the six EU environmental objectives.
10. ESG reporting is on the rise
The UN-supported Principles for Responsible Investment (PRI) offers actions and guidance for companies wanting to incorporate ESG issues into their investment practice. PRI is the world’s largest voluntary corporate sustainability initiative, with 7,000 corporate signatories in 135 countries.
The grass is greener of the other side
With the increase in demand for more sustainable products and services, regulation is expected to push investment advice to incorporate sustainability considerations and disclosures.
The current situation is likely to have an impact on the future of ethical investing. In a recent FT Adviser article, the chief executive at Liontrust, John Ions, believes there will be a greater focus on investing in companies that support making the world a safer, healthier and cleaner place post-lockdown.