Responsible Investing: Past, Present, Future

By Mike Head, DipFA - Director/Certified Financial Planner

I have worked in the financial services industry for over 40 years, and I have been part of Ethical Investors since it first came to be over 35 years ago. During this time, a lot has changed when it comes to responsible investing, but at the same time, some things have barely changed at all.

The Past

In the early days of responsible investing (which I’m going to refer to as RI, to save us all time), relatively few issues were discussed, and exclusionary criteria were limited. The intention of RI was to prevent investments being linked to social ills, as well as being linked to wider negative impacts. This effectively meant screening to ascertain if companies had any ties to the tobacco, gambling, alcohol, or pornography industries (i.e. the “sin stocks”), or if they derived revenue from the sale of weapons, especially if this meant selling arms to oppressive regimes.

This was likely down to the fact that RI was really quite faith-driven, back in the day; numerous Church and Christian groups wanted to make sure that they could invest their money in a way which didn’t go against their ethics. The Quakers, for example, sought to avoid investments linked to South Africa and its apartheid a long time before others did. In fact, the Quakers were one of the earliest pioneers of the whole movement, with Friends Provident being the first investment house in the UK to offer an ethical fund.

Opinions regarding what was and what was not acceptable differed between faith groups, of course (the Catholic Church and Anglican Communion have their own distinct views on a number of topics, for example), but it always came down to the same general areas, such as weapons and tobacco.

That isn’t to say this isn’t still the case, though. Companies like ours are still able to provide advice to faith groups. We haven’t forgotten our roots, or the clients we have served for years now.

The Present

That leads me nicely into the present. As I have just explained, we still help faith groups meet their financial goals while avoiding links to issues such as weapons and pornography, and what you could describe as the standard set of issues (i.e. the “sin stocks”) are still commonly incorporated into the exclusionary criteria of numerous clients.

They also form the backbone of many ethical and responsible products designed for smaller, retail investors. Nowadays, it is almost an expectation that investment funds and model portfolios that want to fit an “ethical” or “responsible” description screen for these issues, as there are very, very few cases where investors seeking RI products are happy to have their money linked to things such as tobacco or landmines.

However, that being said, the number of issues that are being discussed by larger clients, and factored into exclusionary policies for retail products, has grown massively. As I said in a recent interview, there was virtually no screening for things such as environmental degradation, links to palm oil, poor diversity and inclusion practices, and failures relating to online safety when I started in the field.

Positive impact is also a consideration that we see today, but didn’t used to. We’ve moved away from the notion that RI can only be a case of avoiding what clients deem to be bad. Trying to do some good with money is an important consideration for clients today, and interest is on the up.

For a number of people, the idea that companies should only exist to make money is silly, and these same people also believe that they should be able to invest their money in such a way that companies generating positive impacts can benefit, even if it is indirectly.

The Future

Ah, the future. Now I can’t say for certain what this will look like for RI (my crystal ball is in for repairs), but I know what I think it will look like.

Let’s get the dull one out of the way first, shall we? Regulation. I reckon that we’ll see more of it. The FCA’s “sustainability disclosure regulation”, for example, is already a thing of the present, and I don’t see a complete reversal on the horizon. With the increasing interest in sustainable/responsible/ethical investing, the FCA is rightly concerned about consumer protection. I am the same, as are my colleagues.

In the same way that the FCA works to protect consumers from being misled about financial products, it was only a matter of time before they wanted to ensure consumers would not be misled about financial products that claim to be sustainable. I strongly believe that regulators here in the UK and abroad (at least in some places) will only want to further increase protections for consumers going forward.

Secondly, the world is changing (as it always has), and with it so are people’s views. Advisers, managers, fund houses, and the whole RI industry needs to be aware of this. Ethics are not set in stone, they evolve with time, and only those firms which are prepared to adapt to that will continue to meet the needs of investors.

Take the issue of armaments. Conversations regarding this issue have been changing recently, due in a large part to Russia’s invasion of Ukraine; some investors are looking to invest in arms following suggestions by politicians and others that doing so is important for national defence and security. That said, other geopolitical events are making other investors increasingly averse to investing in arms companies, including those which would have previously passed an oppressive regime screen.

These are just two examples (and similar ones at that) of ethical views changing in response to a changing world, and I envision that this will continue in the years to come.

Thirdly, I expect that the industry will see further growth in demand for opportunities to invest for impact and regeneration, including among client bases that would have previously only sought products based on exclusions. People are already growing more aware that responsibly can (and even perhaps should?) mean more than just avoiding the bad - it can also mean supporting the good.

It is my view that investors will still demand investment products that operate exclusionary policies, but this will increasingly become an expected characteristic and starting point, rather than an end point. It goes without saying, however, that just because a fund or model is supporting renewable energy, it doesn’t mean that responsible investors will accept it being linked to guns or human rights abuses.

In summary, then, I’d say the future will probably be interesting, and quite possibly also exciting.