Ethical investment: An introduction
By influencing which companies and products are enabled to scale and which aren’t, investors have outsized impact when it comes to shaping the future of the world.
So, we’ve sat down with an expert in the field, and the lead manager of Quilter Cheviot’s sustainable and ethical investment strategy, Claudia Quiroz, to hear what she had to say about it:
Q: In just a few sentences, what is ethical investment?
Many clients want more from their investments than just financial return. In particular, some clients want their investments to reflect their values and lifestyle choices. Sustainable and ethical investment helps to identify suitable investments to achieve both financial and non-financial investment objectives.
For us, at Quilter Cheviot, Sustainable Investment is seeking to invest in the companies offering the solutions to the global economic challenges of reducing carbon emissions, improving the food supply and demand imbalance, reducing water shortages, and providing reliable power generation, to mention just a few.
Q: And why, in your opinion, is it worth considering?
Sustainable investment gives investors an opportunity to invest in long-term economic growth, as well as to achieve both their financial and non-financial objectives. Growth is a key reason for investors’ interest in sustainability and environmental themes.
Most end markets in this space are expected to grow annually at high single or double-digit rates over the next three to five years, underpinning a long-term structural growth driven by population growth and urbanisation.
Q: What are the most important issues to consider when managing an ethical fund?
In our view, there are many and complex economic and environmental issues around the current challenges of urbanisation, rising living standards in the developing world and reducing poverty in low-income countries. The global population is growing faster than at any other time before, and according to the United Nations is projected to grow from about 7.5 billion people today to 8.5 billion by 2030, with 6 out of 10 people living in urban rather than rural areas.
Notably, there is also a growing body of research indicating that population growth can only be halted by reducing poverty in low-income countries. With this in mind, there is a clear opportunity for investors to identify companies that support more equitable access to resources as well as more efficient ways of managing the supply and demand imbalances that are placing significant stress on resources, particularly energy, water and food.
Q: So we understand of the issues at hand, but how does this translate into concrete investment opportunities?
With these challenges in mind, we need to deliver ‘more’ with ‘less’ in a carbon constrained environment driven by the challenges of climate change.
We see the interaction of these three macro-economic factors: population growth, resource scarcity and climate change, driving the need for a cleaner and more efficient economy - The New Economy.
We think that these 3 macro-economic factors – climate change, population growth and resource scarcity - underpin five investment themes and their value chains: Low Carbon Energy, Food, Health, Resources and Water.
Q: How do you ensure an investment fund is ethical and sustainable?
We usually talk about one of two approaches: negative or positive screening.
An example of negative screening would be to avoid investing in:
- old sectors of the economy – like alcohol, tobacco, military, gambling and pornography
- specific sectors or issues - like nuclear power, GMOs or animal testing
- fossil fuels: mining, oil and gas discovery and exploration
An example of positive screening would be to actively seek to invest in companies involved in
- environmental technologies
- public transportation
- high labour standards across the value chain
- recycling & waste
- healthy food
- water supply & infrastructure
To ensure that the companies fund managers invest in are in fact in line with the investment negative and positive criteria, one either works with an in-house ethical research team or outsources this to an independence research provider.
The latter is our preferred route at Quilter Cheviot, as it gives an independent ethical screening oversight – so the fund does what it says on the tin, from an ethical policy viewpoint.
Q: Most investments are still made with profit as the sole consideration. Is this because ethical investors are penalised in some way?
We have a strong and long track record proven that sustainable and ethical investors can enjoy equal or better returns than mainstream investors.
For example, from launch in March 2010 to the end of May 2017, the Climate Assets Fund, our sustainable investment flagship retail fund, has seen a return of 95.9%, outperforming both the balanced sector peer group and a FTSE UK Private Investor Balanced Index, with 70.6% and 87.2% returns respectively.
Q: Finally, any examples of companies and industries that ethical investment funds support?
Within these five investment themes, we have identified an investment universe of about a thousand companies globally. This gives us exposure to the value chain of these themes with very good sector and regional diversification.
Examples include companies offering energy efficient lighting, public transportation, agricultural irrigation, farming supplies, food testing, vaccines, waste management, coastal protection and water desalination.
For questions about the QC ethical and sustainable investment fund, reach Claudia Quiroz directly at: Claudia.firstname.lastname@example.org
And for enquiries about Quilter Cheviot's services in general, Mark Spedding is your man: email@example.com
Disclaimer: Quilter Cheviot is one of our wonderful event sponsors and partners.
Originally published on 26 July 2017