Engage more members in their pensions by showcasing ethical investments – SRI expert talks about the appeal of this dynamic sector to millennial investors.
Engaging members to invest for a better future
The arrival of Good Money Week is a timely reminder that many of us seek investments that aim to make a positive social difference as well as a financial return. Pension savers are no exception – so making them aware of investment options that allow them to align their pension investments with their values can be an emotive way of engaging them.
As we hear in our interview with Amanda Young, Head of Responsible Investment at Standard Life Investments, offering investments from the growing and dynamic ethical sector could be especially appealing to the younger millennial generation – a huge member audience saving into their pensions for the first time.
Is demand for ethical-type investments increasing?
Yes, it continues to increase. The European responsible investing fund market has almost doubled since 2010 to €476 billion of assets under management at the end of 20161. And here in the UK, the size of the ethical and green funds market was estimated to be greater than £15 billion2 in 2016.
In fact, appetite for all things ethical continues to grow. Beyond financial products, The Ethical Consumer Markets Report estimates all ethical spending in the UK to have grown to £38 billion in 2015. This makes the ethical goods and services sector worth almost double the tobacco market in the UK3.
What’s fuelled this growth?
It’s happening alongside changes in society and a growing awareness that the companies we invest in have a direct impact on the environment and society. This is particularly true of the millennials. This is the generation who have grown up in the shadow of 9/11, experienced the rise of access to information through the internet, and have a growing awareness of society’s challenges such as climate change or inequalities.
Research shows that millennials are ever more critical of unethical behaviour4 and are twice as likely as other investors to invest in companies or funds that target specific social or environmental outcomes5. This is a generation telling us they want to invest ethically6.
They’re also a generation investing into their pensions for the first time through auto enrolment. So there could be an opportunity here to better connect with these savers by making them aware of the different choices they have.
Will members be willing to pay more for an ethical option?
The government’s charge cap does mean that ethical options are sometimes excluded from default investment options as they’re too expensive. So investors will have to actively decide to invest ethically and to pay a bit more to do so.
A YouGov 2016 poll for Good Money Week7 showed just how committed UK investors are to having more ethical options:
- 63% back a kitemark-style label to identify ethical or sustainable financial products; with millions more likely to invest if label is created.
- Almost one in four people (23%) are likely to invest 10% of their pension in impact investment (funds that seek positive social or environmental returns alongside financial returns).
I think that if employers and providers highlight the ethical choice available then some investors may be willing to pay more for an investment that appeals to their personal values – similar to those members who may be willing to pay more for specialist funds.
Do you sacrifice the potential for returns if you invest ethically?
This is a myth that has been around for a very long time. It’s absolutely not the case.
As with all investments, it’s important to look at a fund’s performance over the longer term and understand the strategy its investment manager adopts. For instance, the Standard Life Investments UK Ethical Fund has been running for nearly 20 years and has significantly outperformed its benchmark over that period – delivering 237% versus the FTSE® All Share return of 177%*. The fund has achieved this while excluding a significant number of stocks involved in sectors deemed unethical such as tobacco, gambling and armaments.
*Standard Life Investments UK Ethical Retail Fund in GB compared to the FTSE® All Share index total return, bid-bid basis, in GB: from launch 11 March 1998 to 30 June 2017, source: Financial Express
Growth of the Standard Life Investments UK Ethical Fund over individual 12 month periods up to 30 June 2017.
Past performance is not a guide to the future. As with any investment, the value can go down as well as up. An investor may not get back what they invested.
It’s worth bearing in mind though that any fund that excludes large elements of the market place may have performance challenges if those areas of the market outperform over a given period. Such funds may be more volatile over shorter periods.
Nonetheless, many investors believe that investing in companies that meet sustainability criteria should actually help improve the potential for outperformance. After all, if companies take into account all the risks and impacts of their operations – including human rights, environmental issues and how they manage their employees – their businesses tend to be better managed. In turn, this could help lead to outperformance over the longer term.
How much has the ethical sector changed?
Nowadays there’s a huge range of options for customers who wish to match their investments to their values. These range from traditional ethical funds, which exclude ‘sin sector’ stocks such as alcohol, tobacco and arms companies, through to faith-based options and sustainability-themed funds that address issues like climate change.
And we continue to see investors asking for a variety of options that reflect their own changing attitudes and those of society. Investors have become more sophisticated in their demands, with many moving away from pure negative screening (avoiding certain investments), to more advanced products that include positive selection criteria.
I find the rise in social impact investing particularly exciting. It aims to invest in social enterprises that have been set up to run in a commercial way – for example, Big Issue Invest, the investment arm of the Big Issue. Big Issue Invest has embraced impact investing by financing sustainable social enterprises and charities that make a positive difference to people and communities across the UK.
What’s your one piece of advice to an ethical investor?
Make sure you understand the details of an ethical investment policy. Just because a fund says it’s ethical, doesn’t always mean it is. For instance, our own assessment of competitor policies show that, at the moment, a large number of funds in the UK market place don’t publish their ethical policy on their websites. Public transparency around how ethics are attached to funds is very limited.
Always aim to understand the policy, how it’s implemented and overseen, and how the fund intends to report its performance against the ethical policy. And remember, ethical policies can vary, so make sure they actually match your goals or values.
Why does Good Money Week matter?
The Good Money Week campaign helps grow and raise awareness of sustainable, responsible and ethical finance. It helps educate consumers and advisers that everyone has sustainable and ethical options for their money. It also allows all those involved in the ‘good money’ sector to focus their efforts on promoting all things values-based (an umbrella term used to describe the varied ethical and socially responsible investment types) in the investment world. We’re delighted to be a sponsor of such an important event.
Find out more
All Standard Life’s auto-enrolment pensions offer ethical investment options. This includes a range of ethical funds from Standard Life Investments – one of the regular sponsors of Good Money Week. For more about the options available, have a look at our ethical investing page on www.standardlife.co.uk.
1KPMG April 2017, European responsible investing fund market 2016 statistics
2Vigeo Eiris 2016 UK & Europe Retail Funds Estimate
4ALFI/KPMG European Responsible Investing Fund Survey 2015 (PDF)
5Morgan Stanley: Institute for Sustainable Investing, Sustainable Signals: The Individual Investor Perspective, February 2015 (PDF).
6Standard Life Investments and YouGov Ethical Investments 2015: a poll on values-based investing showed a strong link between age and values; those aged between 18 and 24 had the strongest inclination to invest in companies that achieve positive environmental and social outcomes. Total sample size 2057 adults.
7Good Money Week research was conducted by YouGov. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2171 adults. Fieldwork was undertaken between 17-18 October 2016. The survey was carried out online. The figures have been weighted and are representative of all GB adults.
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Content in this section is provided by Standard Life Investments. The information in this blog or any response to comments should not be regarded as financial advice.
Please remember that the value of any investment can go up or down, and may be worth less than was paid in. Past performance is not a guide to the future.