Though it has become mainstream in recent years, ethical investing dates back centuries to the religious conditioning of business activities.
In the Western world it has roots in movements such as Methodists and Quakers, who in the 18th century prohibited members from participating in the slave trade. However, the modern era of ethical investing emerged from the social awakening of the US in the 1960s, with the civil rights movement and Vietnam War key catalysts. The first ethical mutual fund – the Pax World Fund – was set up in 1971 by two anti-war Methodist ministers who did not want to invest in weapons production or other sectors that profited from the conflict.
In these early years, the basic tenet of Socially Responsible Investing (SRI) was to avoid companies involved in activities considered to be ethically questionable. This practice of ‘negative screening’ was applied to political issues, such as a refusal to invest in South Africa during Apartheid, as well as the so-called ‘sin stocks’ of gambling and tobacco companies. Though the approach grew in popularity during the 80s and 90s, there remained concerns about the relative financial performance of a fund that would exclude potentially profitable securities based on ethical values.
With this potential trade-off in mind, the ethical investment proposition became more sophisticated in the early 21st century with the rise of ‘positive screening’. Rather than simply avoiding negative assets, fund managers began to actively seek out companies that were making a positive impact. Investment strategies that take a company’s environmental, social and governance (ESG) credentials into consideration were formalised in the UN Global Compact’s ‘Who Cares Wins’ initiative in 2005. A year later, the UN’s six Principles for Responsible Investing (PRIs) – developed “by investors, for investors” – outlined the ways in which ESG issues could be incorporated into the practice.
The framework for ESG investing continued to evolve over the last decade, most significantly when the UN adopted 17 Sustainable Development Goals as a roadmap “to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.” This quickly became the leading framework for ESG issues and paved the way for a surge in growth.
Where do we go from here?
Most forecasts point to further strong growth in ESG investing over the next decade, driven by a combination of increased client demand and new regulatory requirements. A recent report by the Deloitte Center for Financial Services (DCFS) suggests ESG-mandated assets under management (AuM) in the US could rise from $12.0trn in 2018 to $34.5trn by 2025, with investment managers poised to launch hundreds of new ESG funds. In the UK, where pension funds are now explicitly required to integrate ESG factors into their investment analysis and decisions, appetite for ethical investment is also growing quickly.
ESG investing may be seen less as an ethical consideration and more as an essential metric for long-term performance. Ultimately, companies that are vulnerable to climate change, unprepared for automation, or maintain a poor human rights record face greater reputational, operational and regulatory risks to their bottom-line.
Beyond this, impact investing, which has the central aim of achieving measurable environmental and social benefits alongside a financial return, will also likely become more accepted as a vehicle for positive change. The Global Impact Investing Network (GIIN) argues that impact investing can be a major force reshaping global financial markets over the next decade, and envisions a future in which it is ‘normal’ to factor a quantifiable social and environmental impact into all investment decisions.
If that’s the case, then one day ethical investing may simply be known as… investing.
