Is Socially Responsible Investing Profitable?

 

 

 

  • What is socially responsible investing?
  • Can you invest ethically and achieve good returns?
  • What does the future hold?

A Changing World

The world is changing at a great pace and the global economy is changing with it. Driven by global megatrends including the rise of the sharing economy, rapid urbanisation, advances in communication technology, decreases in privacy and the rise of environmentalism. And on top of all of this, COVID-19.

All of these megatrends have the ability to cause significant changes in asset prices. Investors who capitalise on trends at an early stage can often profit handsomely. However, as with most things in life, there are generally winners and losers. So where one company emerges from a trend another company often fades away.

The rise of environmentalism is an important trend. In fact, it was not long ago that environmentalism was perceived as radical, it’s now becoming increasingly mainstream. But in the world of investing, where growth is the primary indicator of success, is there a place for environmentalism?

What is Socially Responsible Investing?

Socially responsible investing (SRI) also known as ‘sustainable investing’, ‘green investing’, ‘ethical investing’ or ‘responsible investing’ is an investment which seeks to achieve financial growth whilst also adhering to principles of social and environmental sustainability.

In many cases companies are judged upon their environmental stewardship, consumer protection practices, human rights records and forms of diversity promotion. Conversely, businesses which are perceived to have a negative environmental and social impact including firms who produce tobacco, alcohol and arms are often avoided.

The Trend

In 2019, Bloomberg reported that “global socially responsible investments grew by 34 percent to $30.7 trillion over the past two years”. A large part of this growth stems from growth in retail investor demand across Europe. Japanese pension funds have also widely adopted the strategy.

Drivers of Change

Firstly, governments around the world are becoming increasingly engaged, with the Paris Agreement being the latest example. Governmental investment and environmentally responsible legislation mean that many eco-friendly firms are able to thrive in a market where they perhaps wouldn’t have before.

Secondly, the growth of environmental awareness has meant that retailers and investors are demanding more socially responsible products.

Google Trends 2004-2020 searching for ‘ESG’
Talk or Action?

People are becoming increasingly conscious of the effects of their investing and consumption choices and a significant number of studies have shown that people are willing to pay more for sustainably-produced products.

However, actions speak louder than words. Luckily for the planet, research from the New York University Centre for Sustainable Business (CSB) shows shoppers aren’t all talk, but are actually following through with buying more sustainable goods.

Can you invest ethically and achieve good returns?

As was touched upon above, one of the biggest questions for investors on the topic of socially responsible investing stems from the conventional perception that going green will ultimately diminish returns.

In 2015 academics analysed more than 2,000 studies and found that in roughly 90% of these studies, companies with strong environmental social governance (ESG) profiles had equal or better financial performance than their non-ESG counterparts.

A recent ranking of the 100 most sustainable corporations found similar results, as shown below.

The MSCI ACWI Index, MSCI’s flagship global equity index vs Corporate Knights Global 100 Index of the top-performing ESG.

You Decide

This blog has demonstrated the demand for socially responsible investing is on the up. This trend has been triggered by increasing levels of governmental commitment to fight climate change and promote ethical practices. Moreover, consumers – especially in Europe and North America – are moving towards socially responsible purchasing.

This blog has also demonstrated that socially responsible investing can achieve parity with conventional practices in terms of growth.

If the idea of growing your wealth whilst also adhering to principles of social and environmental sustainability appeals to you, click on the link below.

About us

deVere Insights is a proud component of the deVere Group. Our company has always prided itself on leading the way in the sphere of wealth management. This website is in place to share information and expertise.

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