Millennial Investors Help Drive Huge Surge In Capital Flow to Ethical Funds
The growing demand of those investing online that their capital is invested in companies whose activities and management match their personal values has seen the value of assets under the management of funds characterised as ‘ethical’ surge by over 300%. The new wave of millennial investors has been a particular catalyst to a ten-year rise in money invested in ethical funds from £4.5 billion to £16.7 billion. The figures are based on research compiled by online stock broker Hargreaves Lansdown.
According to data provided by the Investment Association, the UK’s asset management trade body, the trend is also accelerating. Over the first six months of 2018, £600 million was invested in ethical funds by Brits investing online. A decade ago in 2008, that figure stood at a much more modest £180 million over the same first half of the year.
What exactly constitutes an ‘ethical’ fund varies and investors should take the time to carefully read the investment guidelines of each individual fund being considered. Typically, they do not invest in companies that have a poor corporate governance record, are in ‘dirty’ industries or those considered as promoting activities that are proven to be harmful such as coal miners or tobacco companies. Issues important to some investors such as executive pay not exceeding a particular ratio when compared to the company’s lowest paid employees can also be part of the investment strategy of some ethical funds.
However, it is important for investors to dig into the details of funds they invest in if they want to ensure their own interpretation of ‘ethical’ matches that of the asset manager or fund manager behind the product. For example, some ethical funds will invest in oil and gas companies on the basis of their activities in the renewable energy sector. However, for some investors, ‘moving in the right direction’ does not mitigate their core, carbon footprint intensive fossil fuels-based business model.
Companies involved in the extraction or wider business of fossil fuels has become perhaps the most divisive point of debate around the classification of ‘ethical’ investing. Ireland’s sovereign wealth fund recently sold off all of its exposure to fossil fuels following a new bill passed in Dublin’s lower house of parliament to that effect. Norway’s sovereign wealth fund is also in the process of divesting of its investment exposure to the coal industry after coming under political pressure to do so.
Others argue that companies with traditional interests in fossil fuels, such as big energy, are also the biggest investors in renewable energy R&D and infrastructure investment. A further point to the defence of investing in big energy as long as it has a strong commitment to renewables investment is that practically speaking the global economy is still reliant on fossil-fuels based energy.
Is it not hypocritical to drive a petrol car or use domestic energy suppliers whose power stations burn fossil fuels as well as buying energy from renewable sources because the full transition to renewables is still not practical, but refuse to invest in energy companies on ethical grounds? It’s a question with no simple answer and one that individual investors must come to their own conclusions on.
As well as actively managed ethical funds, where a fund manager picks the stocks to invest in, passive index tracking funds with stated environmental or social goals have also taken off in a big way, says the London Stock Exchange. A record number of new ethical ETFs have listed on the exchange this year.
Millennials investing online are, according to a recent YouGov poll, two times more likely to demand their capital is invested ethically than investors from older demographics. 13% of the under-34 age group said they wanted their pension funds to be invested responsibly compared to 6% of the 45-54 age group.
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