Doing good with money: ethical consumers and businesses are the driving forces behind the rise in impact investing

One of the surprising effects of the Covid-19 pandemic was a resurgence of camaraderie: people rediscovered their local stores, applause rang out for national health services and, at the peak of the first wave, many countries saw a sense of solidarity overtake adversarial politics.

Indeed, according to a YouGov survey, a fifth of Brits, for instance, donated to charity between May and July, despite the effects of the pandemic on their household finances.

At the height of the crisis, some people also started to consider the role that businesses can play in society. Companies were praised for stepping up to this year’s social challenges and admonished for bad practices. Many consumers altered their spending habits to support local and independent businesses.

One such independent ethical business, which became employee owned last year with the financial support of Triodos Bank, is Riverford, an organic farm and vegetable box delivery company. During the crisis it has seen an influx of customers. Riverford prides itself on refusing to employ people on short-term contracts or buy vegetables on the open market, instead forging long-term arrangements with growers. “I think there are a lot of people who want to invest their money with some thought, and according to some sort of set of values,” says Guy Singh-Watson, Riverford’s founder. “More importantly, there are a lot of people who want to work in businesses that operate according to a certain set of values, or who want to buy from such [businesses].”

He contrasts this with other, more short-term approaches to business: “You see the most bizarre behaviour on [other] boards where there’s a belief that you exist to serve unimaginative, short-term interests that are, on the whole, destroying the world. Investments in people and the environment do require a long-term approach, which is foreign to the type of aggressive capitalism in the UK.”

As well as altering spending habits, another way to vote with your money is via your savings and investments – by trying to ensure that your money is used for good rather than ill.

Indeed, investments into ethical and sustainable funds have continued to rise this year in spite of the pandemic’s economic fallout – confounding the cynics who’d assumed ethical investments would be dropped during a downturn. According to the financial services company Morningstar, total global investment into ethical funds topped $1tn for the first time at the end of June – almost doubling over the past two years.

“Ethical investing is a bit like ethical consuming but with more financial weight behind it,” says Mike Childs, head of science, policy and research at Friends of the Earth. “Over time the cumulative impact of many people taking these decisions does have some influence on companies and government policy.”

Childs says there are generally two reasons for making sure your money is doing good. “Firstly is a clean-hands policy – people who have decided that they don’t want to be associated in any way with harmful or immoral activities. Numerous people now ensure that their own savings and investments aren’t associated with fossil fuels and climate change.

“Secondly is supporting businesses that are trying to make the world better … These businesses need investment, and putting your money into an investment fund that is smart enough to spot the winners and losers from these businesses means you can help these pro-environmental businesses grow, flourish and take on the big [players].”

These two different motivations correspond to two broad types of investment funds: ethical and impact. Ethical investment funds typically avoid investing in companies that harm the environment and communities. Meanwhile, impact investment funds go one step further by investing in companies that actively try to have a positive effect on society and the planet.

Jacco Minnaar, chair of the management board at Triodos Investment Management, the investment arm of the sustainable bank, says that investors should also think about the risks and costs of not putting their money into ethical ventures. “The cost of continuing to invest in oil companies and the damage they do to our planet will also ultimately lead to higher costs in different aspects: for instance, an increase in your insurance premium because climate change has an effect on the extremities of the weather with floods and droughts. In the end, if you do not change this behaviour of investing, it is likely to affect your other costs.”

In addition, it’s a common mistake to assume that there’s always a trade-off between having a positive impact on people or the planet and the financial returns on your investments. “Studies show that over the long term, and often over the short and medium term, sustainable investments perform just as well or even better than unsustainable investments,” says Charlene Cranny, campaigns director for the UK Sustainable Investment and Finance Association and director of Good Money Week, which raises awareness of sustainable, responsible and ethical finance. “It’s not about choosing lower returns for higher environmental or social impact. It’s whether you want to have environmental or social impact at all.”

Research by Morgan Stanley last year found that although half of investors believed that investing sustainably requires a financial trade-off, this has apparently not been borne out by reality. During previous years of turbulent financial markets, including 2008, 2009, 2015 and 2018, sustainable funds experienced a “significantly smaller” downturn than traditional funds.

One difficulty with assessing the performance of ethical and impact investing is that different studies have used different definitions of ethical, sustainable or impactful practices, different stock market indices as comparators and different time periods. This can make it confusing to see the big picture. However, a German meta-study in 2015 analysed 2,200 different studies that compared corporate financial performance with strong environmental, social and governance principles. It found that the business case for investing in such companies is “empirically very well founded”; the large majority of the studies reported a positive link between the two, which “appears stable over time”.

Some experts believe ethically-minded businesses may often outperform their rivals due to their longer-term perspectives and savvier attitudes to risk (although it’s entirely possible that better business people simply think harder about their ethics too).

Minnaar stresses that, for Triodos, “good” business has to be good business. “We are not a business of philanthropy,” he says. “We are an asset manager offering opportunities for investors who want to invest for positive change, but of course we need to be profitable in doing so.”

Such is the interest in mindful investing, he adds, that even this is diversifying. “The market for sustainable investment is growing rapidly and there are different shades of green investments from the light green space, focusing solely on exclusions or a do-no-harm approach, to a dark green approach where investors have an underlying intention to truly generate positive change by making sustainable initiatives possible.”

Making a difference
Triodos Impact Investment Funds focus on driving positive environmental and societal change around the world and work hard to deliver competitive financial returns. You can invest in the funds directly or via the tax-efficient Triodos Stocks & Shares ISA.

Please note that with investments in ethical funds and companies, as with all investments, past performance is not a guide to future returns and you may not get back the amount that you originally invested.

The tax benefits of an ISA are subject to change and depend on individual circumstances.