Henry David Thoreau, the 19th century American essayist and activist, once said “Goodness is the only investment that never fails”. Since goodness is abstract, we have had no way to measure the level of truth in his statement. What is clear, though, is that until now we haven’t given goodness much thought when it comes to investment. But what constitutes doing good, or making a positive impact with your money, and why should investors care?
There are currently many environmental, social and governance (ESG) issues affecting the world. We split them into three broad groups: climate change, social inequalities and unsustainable production and consumption. The increase in extreme weather events falls into the first category. Meanwhile, the continued existence of poor working conditions and gender discrimination fits into the second. The third is perhaps best demonstrated by the fact that we are living on borrowed resources. We now have an annual ‘Earth Overshoot Day’. Its arrival means humanity has consumed more resources than the planet is able to renew in a year. It fell on 1st August 2018, meaning that the ecological deficit is five months’ long.
Why should we care about where our money is invested? These concerns are valid from an ethical perspective, but they are also relevant to us as an industry. Investors’ concerns about the ESG implications of their investment choices make them so. They want to know that their money is doing good things. Or, at the very least, they want to know that it isn’t doing bad things. Millennials, or those who entered adulthood in the early 21st century, have an active social and environmental conscience. Their responses to the World Economic Forum’s Global Shapers’ Survey in 2017 illustrates it well. Asked what they considered to be the most serious global issue, almost half said climate change and nature’s destruction. On the subject of businesses’ biggest contribution to society, 15% thought it was boosting the economy. By contrast, over 30% said that it was job creation.
What women think is also important. More women than men are concerned about where they invest their money, according to our recent research. Of our survey group, 24% of women liked the idea that their investment choices could make a positive difference. This compared to 20% of men . Women’s wealth is growing, in line with their increased workforce participation and their relative longevity. Meanwhile, millennials make up almost one third of the workforce. Involving them as to where and how their pension funds invest is becoming an evermore crucial consideration. Advisers recognise this trend. Among those we polled, 51% agreed that ESG matters are a way to engage investment’s next generation.
Solutions and opportunities
There are several ways to help these investors achieve their socially conscious investing aims. One is to look at the United Nations’ Sustainable Development Goals (SDGs) and the companies that work to meet them. Announced in 2016, their detailed targets provide measures for assessing a company’s impact criteria. For example, a business’s commitment to sustainable energy can be gauged against clean energy practices and efficiency measures.
While these goals are admirable, it is important for investors to remember that governments, not companies, created them. We should also be open to other ways of implementing ESG considerations into our investing framework. At Aberdeen Standard Investments, we have eight ‘impact pillars’ of ESG investing. These cover a broad range of themes: circular economy; sustainable energy; food & agriculture; water & sanitation; health & social care; financial inclusion; sustainable real estate & infrastructure; and education & employment. We have both a dedicated, central ESG investment function and ESG specialists within different asset classes. This lets us research and analyse global sectors and ask key questions about how companies operate.
But what are the risks?
Taking ESG into consideration when making investment decisions is laudable, but it also presents challenges and risks. It’s necessary to give the subject expert attention. Take climate change, for example. Often, we hail renewable energy as a solution to the problem of rising carbon emissions and resource depletion. However, it comes with its own set of ethical questions.
New kinds of energy rely on different materials than their traditional counterparts. Demand for alternative minerals and metals, such as lithium and cobalt, is rising.
This seems innocuous until it becomes clear that 60% of the world’s cobalt is mined in the Democratic Republic of Congo. Such a location brings human rights and child labour concerns to the fore.
In addition, many countries are introducing new legislation which attempts to address a variety of environmental issues. Everything from plastic consumption to deforestation is under the spotlight. As companies try to operate in line with the new rules, new risks are becoming apparent.
Unique challenges and risks such as these will increase over the years to come. Thoroughly understanding, researching and analysing ESG considerations is becoming increasingly important. Whilst we all have a responsibility to look after our fragile world and society, investors’ money and desire for profits gives them a powerful voice. As stewards of our investors’ capital, we can make that voice heard. This si how we can make a positive and lasting impact.
For professional investors only – not for use by retail investors. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future results. The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security. Source: Gabriel Research & Management Ltd on behalf of Aberdeen Standard Investments, 2018. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.
Aberdeen Asset Managers Limited is registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, Scotland, AB10 1XL, Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL, and both companies are authorised and regulated in the UK by the Financial Conduct Authority / Bonds: a licence to kill? / Illiquid assets and defined contribution schemes.
Amanda Young, Head of Global ESG Research – Aberdeen Standard Investments