‘Ethical’ Investing Predicted to Double in 2021

New research shows that many investors are beginning to move their capital into ‘greener’ investments in response to the threat of climate change – and are increasingly avoiding assets with a big environmental impact.

There’s nothing investors like to see more than a steadily rising line on a graph – unless, that is, the graph is one of average global temperatures. Perhaps belatedly, the financial world is waking up to the very real threat of climate change, not to seem ‘woke’ but out of genuine concern for its long-term prosperity. As a result, an awful lot of money is now flowing out of some traditional assets and into cleaner, greener ones.

This isn’t necessarily a mass attack of conscience. Capitalist economies (i.e. most of them) are discovering there are practical, selfish reasons for being more environmentally responsible. With many investments, such as pension funds, calibrated to span many decades, risks that might a generation or two to materialise must be factored into financial plans made today. And with the monetary cost of climate change estimated by the UN to be up to £210 billion a year by 2030 and £360 billion a year by 2050, it doesn’t take an actuary to warn that polluting assets will be squeezed for as much of this eye-watering bill as possible. Investments that are currently thriving might have become a positive liability by the time longer-term funds mature. So now the smart money is edging away from carbon-heavy assets and signalling, ‘I’m not with them.’

Investors prepare for a major shift toward green assets

Research by OnePlanetCapital, a new sustainability driven investment house, has found that 85% of investors – or nearly nine in 10 – now view climate change as the greatest long-term threat, and many have already begun to move their investments in response. Over one in 10 (12%) have a plan to transfer this year into ‘ESG’ funds (i.e. funds that consider environmental, social and corporate governance factors) and a further 17% have plans to move within the next few years. Meanwhile 70% of investors say they would actively avoid putting money into companies with a negative environmental impact. Given that only a tenth of all investors currently hold any ESG funds, these intentions (if they hold true) should see the ESG market double in size this year alone.

The emphasis investors place on global warming is also significant – it was identified as the biggest threat by some considerable distance, far ahead of overpopulation (second-placed at only 34%) and pandemics (30%). For climate change to be seen as three times more dangerous than pandemics, during a year in which the world’s economy has been devastated by one, reveals just how seriously this emergency is being taken.

‘It’s very clear this sentiment is felt among investors,’ says Matthew Jellico, co-founder of OnePlanetCapital. ‘[They] are becoming increasingly aware of businesses that do, and do not, have a positive environmental impact and willing to take on more risk to ensure their investments reflect their views. We know now that investment performance does not need to be sacrificed in order to tackle the environmental problems of the day. UK sustainable funds are likely to outperform the market over the short, medium and long term, creating greater growth opportunities.’

Do ‘ethical’ funds make good investments?

Since ‘ethical’ investments remain in a minority – around a tenth of the popularity of standard investments – a like-for-like comparison isn’t easy. Standard investments are chosen with a single-minded goal, which is generating a return, whereas the goal for ethical investments is twofold: generating a return but also doing no harm (or perhaps even repairing harm previously done by others). Given this more challenging approach, it’s natural for investors to wonder whether ethical investments can deliver the same kinds of returns that they are accustomed to.

The good news is that ethical funds don’t tend to underperform. It’s true that the choice of companies to invest in is currently far more restrictive, but this is expected to change rapidly over the years as more businesses discover the funding opportunities available. Ethical investments also tend to be less volatile, with fewer growth spikes, but again this can be a plus as it generally means fewer big dips too.

One thing in particular to watch out for is management fees, as these may be higher for ethical funds. Picking companies with ethical practices and strong environmental credentials requires significant research, so this may be reflected in the charges investors must pay.

Fees notwithstanding, in the long term ethical investments should not mean compromising on returns. In fact, the reverse is more probable. Non-ethical assets are likely to become increasingly shaky over the coming decades, as greener companies attract the lion’s share of government subsidies, tax breaks and other incentives – along with more of the private equity. So while there may yet be ‘fire sale’ gains to be made from the carbon-heavy industries, their heyday is most likely drawing to a close. The very high valuations of companies such as Tesla (which many suggest is overvalued) shows how much money is pouring into cleaner technologies in expectation of what the future may hold.

By definition, ethical investments are likely to be in more sustainable industries, so – broadly speaking – should have a lower risk of sudden crashes. Nevertheless, investors need to be wary of another ‘dot com boom’, this time for ethical investments, and should resist the temptation to splash out on a stock just because of its green credentials. A good ethical fund will still look for profitability first and foremost, and only then assess it for its environmental and social impacts.

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This article first appeared on Unbiased.