About 20% of all professionally held funds in the US are now considered to be “Sustainable” This sector can be known by different names including sustainable, ethical and socially responsible.
This sector aims to invest in “good” companies and/or avoids investing in “bad” companies. The definition of good and bad can vary from company to company but there are several reasons why this sector is growing so fast.
Firstly, it is becoming much easier to identify companies because businesses are now voluntarily (in some cases) disclosing what their sustainability score is. Companies are providing details on things such as gas emissions, Waste management, Water management, land use and toxic spills etc.
Companies are not doing this voluntarily for any other reason other than it is good for business. This I believe is one area where the financial fund industry can have a serious positive impact on the world. As funds demand more information from companies, companies respond by improving their numbers. We have seen evidence of this in the number of companies willing to even report their figures.
But it also evident that millennials, people who became adults since 2000, will seek out to deal with companies who are more socially responsible.
Lastly companies do this because in the long term it should make them more profitable companies and less dependent on the likes of volatile commodity prices.
The tipping point is close, when things like solar panels make financial sense on people’s homes, why wouldn’t businesses be the same? They are, yet they are improving in lots of areas not just getting your hot water from the sun.
Companies being more sustainable to attract young adults as customers and funds as investors, combined with the ever improved level of information that is available has led to a perfect storm for this sector.
Traditionally this type of investing was restricted to simply not investing in companies that were engaged with child labour, the arms trade, tobacco or factoring farming. With the information now available, it still includes all of this but fund managers can go much deeper, opening up greater opportunity for investment.
The lack of interest in Ireland in this type of investing is evident in the fact that Aviva closed all their Socially Responsible Investments last February. Fund flows into these types of funds in Aviva suggested Irish people just had no interest.
I am 18 years advising clients, I have only been asked twice if this field even existed. Interestingly both of the clients who asked, had an attitude that they accepted they would have to take lower returns in return for a clear conscience.
In my opinion this attitude meant that the sector would never take off. Unless the industry can show that the very best companies to invest in are the ones who are sustainable and unless the companies start behaving better to be an attractive investment options the sector will struggle.
I have witnessed a slow shift in attitudes in this field over the last 18 months and I believe we are reaching a point where you can have your cake and eat it. It will be interesting to see where this goes, but it probably is the biggest opportunity the fund management industry has to have a positive impact on the world, for once.