As world leaders have spent two weeks discussing the climate emergency at the COP27 summit in Egypt, inevitably everyone’s thoughts have turned to the impact that all of our activities have on the environment.
It will be interesting to see what impact this renewed and increased focus on green issues might have on the behaviour of investors. Ethical investing is already becoming more favoured, with both investors and investment companies changing their focus to be more ESG compliant.
The prominence in the headlines of the COP27 summit is part of an ongoing global shift towards ethical awareness. There is already evidence that ethical considerations are starting to rank alongside security and performance as factors to be taken into account when building a portfolio.
Ethical investment has existed for a long time, albeit as a distinctly minority interest. And traditionally it has been social rather than environmental issues which have driven ethical investment decisions – principally, avoiding specific sectors such as arms manufacturers, tobacco producers, gambling firms, companies which use animal testing, and so on.
Events such as COP27, coupled with high-profile demonstrations such as those we saw on the M25 last week - not to mention the ongoing energy crisis - are all factors in the general shift towards more environmentally aware investing. Those pursuing this route are just as likely to add fossil fuel corporations to their ‘no invest’ list as cigarette makers.
Up until now, ethical investors have been more focussed on where they don’t want to invest than making positive green investment decisions. It’s quite likely that those investors will now be more proactive in picking areas where they want to see their money lodged, such as green technology companies or those firms which take a proactive approach to minimising their impact on the environment.
This is especially true of younger investors, for whom the most likely first port of call on their investment journey will be a workplace pension. Increasingly these are offering ESG-appropriate funds, and this is enabling more people to dip their toes into ethical investing.
As this generation get older and become more active investors (this often happens in the last 15-20 years before retirement), we can expect to see such ethically-driven investment decisions becoming much more mainstream.
But what about investment performance? Does taking an ethical stance mean compromising returns?
Actually, it is quite possible that taking an ethical viewpoint when it comes to investment decisions could have a longer-term financial benefit. As ethical investments are more growth focussed in their strategy, the focus on longer-term change to deliver returns through more ethically adhered companies could show to be more profitable for investors.
This is because large-cap companies will be wanting to show that they are compliant with an ESG approach, in part due to increasing pressure from their consumers, so not excluding them from ethical investment funds and the funds selection criteria
Coupled with this is the fact that we are likely to see increased taxation of fossil fuels coupled with government subsidies and other incentives for green energy initiatives, and it could well be the case that any ‘ethical penalty’ in financial terms will disappear and may even become an ‘ethical premium’.
As we have seen at the COP27 summit, political changes are likely to come slowly, but market behaviour may well race ahead of any political deadlock. What seems sure is that ethical considerations are increasingly going to be part of the investment decision-making process, and both environmental and social considerations are going to be up there alongside pure financial factors when it comes to making investment decisions.