Impact investing, responsible investing, environmental, social and governance investing – these are all different branches coming from the same tree and have been rising in popularity.
As interest in climate-related issues has been growing for some time, more and more investors have been looking towards making their money work for the greater good.
The consumer-facing campaign Make My Money Matter has played a key role in encouraging people to explore where their pensions are invested, as well as how they could change this to contribute more positively to society and the environment.
Naturally, all fund managers want their investments to last in the long term, raising the question of whether those funds that do not offer some form of sustainable investing are likely to get left behind.
With so much money invested in pensions, many investors will see this as the easiest form of responsible investing and putting their money towards a good cause.
Morningstar data on sustainable fund flows found that investors, especially in Europe, are becoming far more engaged in responsible investing and this demand is being met by a large number of fund launches.
So is moving towards some form of sustainable investing inevitable?
Dan Kemp, global chief investment officer of Morningstar Investment Management, explains that despite the range of approaches to sustainable investing, the fund options available on most platforms remain narrow and so it is likely to be some time before investors can fully express their values and preferences through their pension investments.
“It is also worth noting that most fund selectors require active fund managers to have a track-record managing their current strategy before investing,” he says.
“With so many new sustainable funds being launched recently, the track records of managers in this area is often short, leading some investors, including Morningstar Investment Management, to make greater use of passive funds.”
Kemp explains that many of these passive funds have been launched as exchange-traded funds, which are not available on all platforms, and where they are available, the cost of portfolio changes can be prohibitive for smaller accounts.
“This is naturally reducing the access to high-quality sustainable portfolios,” he adds.
But Minesh Patel, chartered financial planner at EA Financial Solutions, says workplace pensions are one of the largest sources of retirement provision, with many employees investing in default retirement strategies designed to provide decent returns without the need to have sophisticated financial knowledge.
He says: “Many of these do not take into account sustainable investing since their ultimate aim is to provide employees with a good pension in retirement. However, beneath the default option, many pension schemes offer sustainable investing funds that can be accessed.
“Therefore individuals should assess how much of their pension is invested in companies that are so-called bad actors and seek out a cleaner alternative.”
Vote with their feet
Using the Brundtland definition, John Ditchfield, head of responsible investing and wealth management adviser at Helm Godfrey, says 'sustainability' for many people means not degrading the natural environment up to a point where future generations are likely to have an impaired standard of living due to environmental problems.
