How can you invest responsibly?
There is something of a generational gap appearing in the world of investing. Older investors appear to see investing and social responsibility as separate things; younger investors do not. Given that the latest estimates suggest we are in the middle of the biggest wealth transfer in history – with approximately US$60tr of assets being handed down the generations in the next few decades – the investing habits of the younger generation have become extremely influential.
That is a serious amount of money, and it has the potential to change the world we live in. Socially responsible investing is the next big thing. It can be tricky to define, but the general gist is that it is an approach to investing which aims to incorporate environmental, social and governance factors (ESG) into investment decisions. The aim is to better manage risk and generate stable, long-term returns.
Think of the difference between investing in fossil fuels which are bound to run out one day as opposed to investing in renewable energies which are likely to be around for the rest of human history.
Short-term gains are simply not as important to many serious investors as they used to be. As mentioned previously, the stats show that the younger generation in particular are less interested in making quick money if it means sacrificing the planet or the people and animals which live on it. In addition, the investing trends of the younger generation show that they are less inclined to undermine good governance through bribery, tax dodging, extensive lobbying and obscene bonus payment structures. Transparency and honesty is back in fashion.
Groups and networks such as The ImPact are pledging to create measurable social benefits through their investments. This group in particular is an interesting one as it is made up of super-rich young people from famous families – think Ford, Rockefeller and Pritzker Simmons – who are essentially using their connections and leverage to get their super-rich friends to do something good with their cash. The ImPact currently has more than 100 signatories with an average wealth of US$700m each.
But it is not just the super-rich who can have a serious impact. As modern communication technology reveals more and more information to the average person, more and more people are paying attention to the harm being done by people investing on their behalf. For instance, the transparency provided by social media has led to a massive upswing in divestment campaigns across the world.
Pension funds are the best example of what mass pressure from the ground up can achieve. For many people, a pension is the largest and most obvious investment they have. It is certainly the only one which crops up in many people’s day-to-day lives, and for that reason the pension industry has become the front line of pressure for people looking to positively influence their futures. For instance, giant funds from around the world such as Axa are taking their client’s concerns on board and leading the fight against fossil fuel companies in the same way that they were once forced to take on tobacco firms.
In total, it is estimated that pension funds around the globe have divested US$6tr from fossil fuel companies as part of their larger ESG investment initiatives. This amount is only going to increase in the future as more and more of the younger generation have a bigger say in pensions.
Governments are not immune to this pressure either. A good recent example is the Government Pension Fund of Norway which recently made a major move to divest from fossil fuel and instead back renewable energy sources. It is also being put under serious pressure to divest from gambling stocks as well as using its clout to tell the firms it has invested billions in, that they must fight harder against corruption and bad governance.
Another good example of public pressure having results is the UK government deciding in December 2017 that Britain’s £2tr workplace pension fund will be more easily allowed to divest from harmful industries. Previously, funds had been hamstrung by a fiduciary duty to find the best returns for customers regardless of the harm an investment might cause to people or environments. This led many to reject calls from members to divest from bad industries in the name of earning more money. Now however, the ethical wants of the people paying into the fund can be brought into the investment process, leading to a far greater degree of flexibility and hopefully many more ESG investments in the future.
A final recent example is New York City. Mayor Bill de Blasio decided to remove US$5bn of the city’s direct investment from fossil fuels at the same time as working on a plan for the city’s many pension funds to remove their US$189bn from the industry in the next five years. As a nice extra touch, the city is suing the major oil companies for misleading the world on climate change and causing untold damage to people, places and lives. Given that New York is home to Wall Street, around the world’s foremost financial centre, this decision is likely to ripple about the world.
The fear amongst oil companies is real this time – or it is with the smarter ones at least. Not a month goes by where you don’t hear about a Shell or a BP deciding to put more cash into renewable technologies to safeguard their future.
The trend is clear and the clamour for divestment of fossil fuels will only become louder over the coming decades. ESG investments are soon enough going to be the only ones accepted by large swathes of the public, and the younger generation will have the power, finance, knowledge and will to enact these wishes.
The future can sometimes seem bleak, but things are moving in the right direction. If you are looking for your next investment, it might be advisable to get on the right side of history and invest in socially responsible sectors. The Financial Times has reported that six in 10 investors plan to increase their socially responsible investments over the next decade. This is not the time to be in the 40% minority.