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20 pledges for 2020: Why ethical funds could be 'the next investment mega-trend'

Picture: Getty Images
Picture: Getty Images

Feeling low at the moment? You’re far from alone. So here’s a piece of unalloyed good news.

Financial adviser De Vere says more than a quarter (26 per cent) of its well heeled clients are either considering or are actively engaged in responsible and sustainable investment.

There has been a lot of talk in the wake of the Covid-19 outbreak of people wanting capitalism to do better.

De-Vere’s statement is important because it suggests that people with the money to commit to making it happen are actually doing so.

The broker's CEO and founder, Nigel Green said: “The fundamentals that ESG (Environmental, Social, Governance screened) investing represent and champion have become more highly valued by investors than ever before in the last few months.

“Why? It is the Covid-19 effect, which has shifted the values of our society.”

He went on: “The global pandemic has brought into laser-like focus how the health of our planet affects human health which, in turn, affects the way we all live and work.

“These shifts in values and new economic realities have meant that companies’ responses to the public health emergency are being carefully scrutinised by investors in terms of their social and governance policies too.”

This serves to explain the popularity of ESG funds, which can be expected to exclude companies seen as having behaved badly during the pandemic on governance grounds, and maybe others too.

Their investors can therefore feel good about where their money is coming from, and pat themselves on the back for being part of the solution. Profit while saving the planet? Yes you can have it all.

An important point to note is that fund managers that have nailed their colours to the ESG mast, and have a genuine commitment to the market, often follow through with their non ESG screened funds.

Legal & General Investment Management is an example of a company with a history of active engagement with investee companies across the board. It publishes an annual list of companies excluded from its future world range, and votes against their boards with its other funds.

Green argues that there are reasons for believing that interest in ESG funds is going to grow, and not just as a result of the pandemic. Millennials, who tend to be more socially aware as a group, are poised to benefit from a substantial generational transfer of wealth.

As they inherit, or just accumulate more investable resources through their own efforts, they are likely to further fuel the boom in popularity of ESG funds.

He describes this as the next “investment mega-trend” along side tech.

If he’s right, companies are going to have to wake up.

As ESG funds take up a larger percentage of the market, those that fail to pass muster will be denying themselves access to a substantial and growing pool of capital.

The price they pay for the funds they require may go up as a result, by contrast to those that pass ESG screening tests.

Some of the actions actions engaged in by companies on grounds of cutting cost; making messes they don't clear up, treating workers badly, may start to become self defeating.

The fact that ESG funds have been performing relatively well during the economic disruption delivered by the pandemic only adds to their allure.

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