Ethics has entered mainstream investment thinking

Sustainable investing is no longer a sideshow and is moving closer to centre stage.

The asset manager for a changing world” seems a fitting description of BNP Paribas Asset Management, following its recent research paper on renewable energy versus oil. In ‘The death toll for petrol’, Mark Lewis, the investment bank’s global head of sustainability research, sets out a compelling case for long-term investment in renewable energy for transportation, when assessed in terms of the energy return on capital invested – shortened to EROCI.

- Check out our newly launched ethical portfolio 

Essentially, the research paper says: “What we are most interested in is how much a given capital outlay on oil and renewables translates into useful or propulsive energy at the wheels: in other words, for a given capital outlay, how much mobility can you buy?”

The report finds that the capital intensity of getting oil out of the ground and then refining it into petrol and diesel is significantly higher than that of producing renewable energy to power electric vehicles (EVs). Indeed, the EROCI analysis shows that renewable energy produced for electric vehicles provides up to seven times more net energy than oil at $60 a barrel, for the same capital outlay.

Lewis reckons that with 36% of demand for crude oil today accounted for by cars and other light-duty vehicles susceptible to electrification, and a further 5% by power generation, “the oil industry has never before faced the kind of threat renewable electricity in tandem with EVs poses to its business model”. That threat is a competing energy source that has a short-run marginal cost of zero, is much cleaner environmentally, is much easier to transport and could readily replace up to 40% of global oil demand if it had the necessary scale.

Lewis concludes that “the economics of oil for gasoline and diesel vehicles, versus wind- and solar-powered EVs,is now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors”, and that oil needs to be consistently priced somewhere between $10 and $20 a barrel to competitively power mobility.

Now, sceptics might argue that BNP Paribas has merely done an excellent job of talking its own book in its 40-page white paper, and that mass use of full EVs is some way off. For investors, however, the conclusion reached shows that sustainable investing is no longer a sideshow and is moving closer to centre stage. Growing public awareness of the factors contributing to global climate change, or the climate emergency, is one reason for this. A desire to be seen to be doing some good when investing is another.

Point of principle

Designers and promoters of financial products are responding to growing demand for wide-ranging ethical investments from both institutional and retail investors. For example, bond and equity market indices are available, identifying companies that score highly on their environmental, social and governance (ESG) policies. And more funds and their strategies are being defined in terms of their ‘social impact’.

A wealth of analysis (see Do investors have to choose between green and greed? for some examples) supports the argument for ethical investing.It shows that investors do not need to sacrifice profits for principles and can have the best of both worlds: ‘values and value’.

This year’s Money Observer Fund Awards show that several funds with varying degrees of ethical or ESG filtering in their investment process can mix it with the best of their peers when assessed for consistently strong, risk-adjusted returns. Perennial award-winners such as Rathbone Ethical Bond and Royal London Sustainable World have this year been joined by Aberdeen Responsible UK Equity, BMO Sustainable Opportunities Global Equity, Liontrust Sustainable Future Defensive Managed and Royal London Sustainable Diversified (the last two mentioned scooped our mixed-asset – lower-risk awards).

Several funds that adopt ethical, ESG or sustainable responsible investing (SRI) criteria are also among Money Observer’s Rated Funds for 2019. Along with the funds from Royal London and Rathbone already mentioned are UK-focused funds Liontrust UK Ethical, Royal London Sustainable Leaders and Unicorn UK Ethical Income. Overseas-focused funds include BMO Responsible Global Equity, Impax Environmental Assets and Stewart Investors Asia Pacific Sustainability.

Ethical, SRI and environmental funds that stand out in the crowd

Fund/trust % total return and
official sector quartile
rank after:†
  6 mths Rank 1 yr Rk 3 yrs Rk
Impax Environmental Markets IT (R) 15.5 2 11.4 2 62.7 1
BMO Sust Opportunities Global Equity (A) 17.4 1 8.4 1 54.5 1
BMO Responsible Global Equity (R) 16.3 1 7.4 2 49.5 1
Royal London Sustainable World (R, A) 17.4 1 11.0 1 46.6 1
Renewables Infrastructure IT †† (R) 9.9 1 22.3 1 43.8 2
Sarasin Food & Agriculture Opps (R) 9.5 - 4.7 - 43.2 -
Liontrust UK Ethical (R) 13.8 1 5.2 1 42.2 1
Pictet Water (R) 17.7 1 13.6 1 38.7 2
Royal London Sustainable Leaders (R) 13.2 1 7.2 1 36.6 1
Stewart Inv Asia Pacific Sustainability (R) 7.6 - 6.1 - 32.8 -
ASI UK Responsible Equity (R, A) 9.8 1 3.1 1 30.5 1
Royal London Sustainable Diversified (R, A) 12.1 1 8.4 1 29.3 1
Liontrust Sust Future Defensive Mngd (A) 9.1 1 6.8 1 25.2 1
Unicorn UK Ethical Income (R) 3.7 2 -1.1 1 24.0 1
Stewart Inv Indian Subcontinent Sust (R) 4.7 - -1.6 - 23.8 -
Rathbone Ethical Bond (R) 6.6 3 7.2 3 16.8 1

Notes: Table shows ‘ethical’ funds that won a Money Observer fund award or are currently Rated for 2019, ranked by three-year return. (R) = Rated Fund. (A) = award winner. † Performance with income reinvested, as at 8 August 2019. ††Rating is currently suspended due to a high premium to net asset value. Source: FE Analytics.

Confusing picture

Most investors, however, will struggle to find a fund that both suits their ethical preferences and offers the ideal combination of decent (ethical) values and attractive value.

Some funds are open to accusations of ‘greenwashing’ – by describing themselves as sustainable when this means only that their profits are sustainable, for example. What’s more, ethical investing terminology can be baffling. SRI, for example, can stand for either socially responsible investing or sustainable responsible investing.

Then there are the subtle differences between ethical styles to contend with. The SRI and ethical investment information hub Fund EcoMarket ( groups funds into categories ranging from relatively simple concepts such as negative ethical (funds that exclude specific sectors such as tobacco and defence) and environmentally themed (focusing on long-term resources and climate issues) to more nuanced groupings such as ESG plus (combining ESG principles with ethical screening) and ethically balanced (a sometimes complex arena that combines positive and negative ethical screening criteria). Adding to the complexity are socially themed funds, which focus on people issues, and sustainability themed funds, focusing on ESG and SRI strategies.

To assist ethical and environmentally minded investors in the quest to find funds to meet their needs, our sister website, interactive investor, is launching an ethical investing hub featuring a “long list” of ethical funds, exchange traded funds and investment trusts that are grouped into three easy-to-understand ethical and ESG categories: Avoids, Considers and Embraces.

Having been closely involved with a lengthy process of getting to grips with these ethical categories, I can honestly say it has been an education. From a personal perspective, I’ve also become more attracted to the ideals of ‘investing for good’. In the changing world described by BNP Paribas, capitalism ‘red in tooth and claw’ is fast becoming less acceptable and sustainable, and a growing range of good funds now seek to capitalise on that shift.

The author was editor of Money Observer from 1998 to 2015.

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