Ireland’s sovereign wealth fund is set to divest from fossil fuel stocks, the Church of Ireland has pledged to do likewise by 2022, while Norway’s $1 trillion sovereign wealth fund, the world’s largest, doesn’t invest in tobacco shares and has proposed steering clear of oil and gas stocks.
Sustainable investment is becoming increasingly mainstream, but can you really “do well by doing good”, to borrow that oft-used phrase? Or does embracing ethical investment principles mean sacrificing returns?
Far from involving a financial hit, sustainable investment can be “a route to superior portfolio returns”, says Swiss fund giant Pictet Asset Management. The enormous growth in the industry suggests investors are buying into that message – more than a quarter of the $88 trillion assets under management globally is now invested in environmental, social and governance (ESG) assets, McKinsey estimated last year.
Some of that money, as in the case of the Irish and Norwegian sovereign wealth funds, is invested in funds that exclude so-called sin stocks that make money from alcohol, tobacco, fossil fuels and so on. However, a policy of engagement, whereby shareholders seek to use their influence to improve companies’ ESG policies, is much more common these days.
As a result, some surprising names crop up in ESG funds and indices. British American Tobacco and Royal Dutch Shell, for example, are among the top holdings in Vanguard’s “socially responsible” European Stock Fund, while mining giants BHP Billiton and Anglo American can be found in the FTSE4Good UK index.
While different ESG investors may diverge in their approach, most agree there are obvious financial benefits to adopting some kind of socially responsible criteria, and that ethical companies often tend to be better investments.
Earlier this year, billionaire investor and Blackrock founder Larry Fink argued such companies would be rewarded by “increasingly aware customers”, allowing them to protect their brand, attract top talent, and “better navigate the transition to an increasingly low-carbon and digital economy”.