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Mapping the future of ethical investing

Can responsible investing deliver strong returns and a better world? Big Issue Invest chief executive Danyal Sattar looks at where it has come from, and where it’s going

What would the pioneers of sustainable investing think of progress today? The 1980s were a time when the role of finance in driving unsustainable behaviours was beginning to be understood. The Big Bang of deregulation of the City of London was part of an increasing flow of international capital, seeking higher returns. The logic for markets was simple: maximise returns to the shareholder.

A few pioneers in the USA, UK and across the rest of Europe thought we should harness this wave of capital for good. The way had been shown by the anti-apartheid movement: from protest came action. Which companies and financiers were investing in South Africa and could they be boycotted? The church and civil society groups who led those initial campaigns supported research organisations who were a vital component in the next step. Who was financing clear-felling of rainforests? Who was manufacturing firearms? Who was investing in coal mining and coal power stations? Climate change, after all, has been business planned and financed. 

If you wanted to avoid investing in companies doing the stuff that was damaging society and the planet, you could. The very first UK unit trust funds that ordinary investors such as you and I could invest in, the Friends Provident Stewardship Trust, under pioneer of ethical investment Charles Jacob, and the Merlin (now Jupiter) Ecology Fund, under Tessa Tennant, started up and the seeds of responsible finance were sown. 

Today, 20 to 30 per cent of the world’s investment assets are invested with a responsible finance lens. The Global Sustainable Investment Alliance 2018 report showed assets at $30.7tn, a 34 per cent increase in two years.

Investors though will be wondering if ethical equals effective. So what’s the future for investments that deliver positive impact?

Responsible investing is done in four main ways. In the beginning, negative screening. Could we avoid the bad stuff? With apartheid, companies with significant operations in South Africa. Latterly, the climate-heavy companies in oil, gas and of course coal. This approach had limits. A good piece of investment performance is not down to your manager, but by how widely spread your portfolio is. The more diversified the better. Over time diversification gives you a return advantage. Limit your portfolio by taking out whole sectors, like fossil fuels, mining, tobacco, the arms industry and you end up with a less diversified portfolio that might perform less well. This concern led to the next strategy, positive or best in class.

Companies in the same sector can have different social or environmental performance. One oil company might have significantly more energy-efficient refineries and have lower greenhouse gas emissions than another. You avoid the worst performers and signal to the best performers that you back their approach.  

Then there are environmental, social and governance (ESG) factors integrated into investment assessment. An emerging hypothesis, backed by some data as the track record for the sector grew, was a positive relationship between good corporate governance and good financial performance. Good ESG performance could be an indication of good management, and good management is associated with good financial performance, so ESG integration could be a win-win. 

Finally, corporate engagement and shareholder action. The early days of green, ethical, socially responsible investment engaged with companies to bring about change, just as ethical investors previously had with companies investing in apartheid South Africa. That approach continues today.

At the same time as sustainable, responsible investment, a parallel, direct impact investment movement emerged. Microfinance, pioneered by social entrepreneur Muhammad Yunus in Bangladesh and scaled up globally, lent directly to the poor and the emerging middle class. Here in the UK direct social investors started up, such as Ecology Building Society, making green mortgages to build environmentally sustainable homes, and Triodos Bank, extending its operations from the Netherlands and Belgium into the UK. Unity Trust Bank was set up by trades unions and the Co-operative Bank. Charity Bank set up in 2002 and Big Issue Invest in 2005, making direct loans and investment into charities, social enterprises and other social businesses. 

The Global Impact Investing Network estimates the size of the global social impact investing market at $502bn. UK social investment is estimated £2.3 billion, according to Big Society Capital. We at Big Issue Invest are a core part of this sector. We have around £75m of funds under management and advise on public market funds worth £160m.


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Over the last 40 years, investors in the UK have shifted their money to funds that do good. Yet carbon emissions are at an all-time high, globally. The extinction of species is 100 to 1,000 times the background loss we might expect through natural evolution. We are running a big overdraft on the environment. 

So why have we not had the impact we wished for? The bulk of the world’s assets are still invested unchanged, with 70 to 80 per cent invested without sustainable or
social constraints. 

Well, just because you haven’t arrived yet, don’t stop. We must achieve a world where we invest 100 per cent for impact, where every investment bears the full costs of its impact, negative and positive alike. If we do not do that we will have continued to carefully invest in the business plans that drive global heating and extinction. 

We must though use other tools alongside sustainable finance. Business needs good regulation to flourish. Technological change can drive change, as can taxation or subsidy. Ten years ago, the Green Fiscal Commission’s finding was that with a relatively small shift of taxes to “green” taxes, a 10 per cent cut in CO2 emissions was achievable over a 10-year period at almost no overall economic costs, over and above what would be achieved otherwise. Basically, we could have had a free cut in emissions. These long, slow shifts can go almost unnoticed but have a big long-term effect. 

If our generation ends up in the dock, accused of crimes against the environment, the main prosecution case will not be that we failed at a huge task but we could not be bothered to do the small stuff which, in the long run, would have saved the world. So let’s keep moving our money, back progressive environmental policies and support green tax reform. Three steps for a sustainable future.