The Arkenstone Blog

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As a soon-to-be parent, I find myself reflecting on the world our little sleep-depriver is about to enter. Today’s ‘yoof’ (I’m old enough to use that term now) are born into a world where the environment, corporate responsibility and sustainability are central to many aspects of our lives.

Not only are these issues changing our attitudes towards our health, food and waste habits, but also the way we choose to manage our money. In particular, we’ve seen a significant increase in people (of all ages) investing in Ethical and Socially Responsible Investment (SRI) funds in recent years. This fund sector in the UK has grown by a third in just the last five years alone.

That was then…

Ethical investment funds aren’t a new concept. They’ve been around for over 30 years and were developed to satisfy a small number of investors who demanded that their investment choices reflect their moral ones.

Like any fund, ethical funds invest in the shares of global companies in order to deliver returns for investors. The difference is that ethical funds avoid investing in companies whose products and operations cause harm to society or the environment (negative screening criteria) e.g. arms, mining, tobacco and gambling industries.

Over time, this approach has carved itself a tidy niche in the investment fund market. The wider investment community, however, has always been a little dismissive of this approach, as it’s generally thought that placing too many restrictions on fund managers can compromise the returns they’re able to generate for their investors.

And for the most part this was historically very true; underperformance was often the price that ethical investors paid to invest with their conscience. More recently, however, we’ve seen a big shift in thinking by both investors and fund managers.

A brave new world

A new branch of ethical investing has evolved in more recent years. Socially Responsible Investing (SRI) typically involves identifying and investing in companies whose products, structure, operations and people practices make a positive contribution to people’s lives and the environment (positive screening criteria).

If this sector had a strapline, it would be something like “make money and do good” (like any investment fund, the make money bit isn’t guaranteed and capital is at risk!). The issues these funds consider can be broadly categorised as:

Environment Climate change, pollution, biodiversity, environmental management, waste management, use of natural resources (water, forestry, mining).
Social Human rights, labour standards, equal opportunities, food supply.
Governance Board structure, executive remuneration/bonuses, anti- bribery and corruption.

More of these funds continue to come to market and investment habits are therefore changing quite rapidly.

These trends aren’t lost on non-SRI fund managers either. Why? The thinking goes that companies that operate in a responsible way are in fact more valuable than those who simply pay lip service to the issues of the day.

Corporations have always been under the microscope but the lens through which they’re now viewed has changed and is arguably much less forgiving. Technology, social media and online communities put company profits and share prices under more immediate threat.

Think questionable data practices at Facebook or reports of a high-carbon supply chain at Tesla. These issues were barely on the social agenda five or ten years ago but now matter to all fund managers and investors alike.

Back to the future

By the time my child begins actively investing for their future, who knows what the world will look like. What we do know is that being socially and environmentally aware are more desirable human traits today than ever before.

This view of the world will be the norm for future generations. It will inform their investment habits and the SRI fund market in the US (currently valued at approximately $3 trillion) is estimated to grow to a staggering $30 trillion over the next 10 to 15 years.

The question is how strongly do you feel about the issues of the day?

Should you be investing differently?