As we edge our way back towards post-pandemic normality, there’s unequivocal evidence of a burgeoning investor consensus which seeks to re-evaluate the long-established definition of successful company performance, writes Christine Hallett, managing director at Options UK.
Where once our measures of corporate accomplishment were determined by purely financial considerations such as swollen annual profits or a powerful balance sheet, each contributing to an upward share price trajectory, the pandemic appears to have given investors a much broader perspective.
A recent survey of financial advisers, undertaken by fund managers Schroders, found that 52% expect a positive change in investors’ attitudes towards sustainable investing.
The pandemic has given many of us much-needed perspective, allowing us time to consider what really matters. Indeed, Covid’s influence on investor attitudes reminds me of Einstein’s famous words: “Not everything that counts can be counted and not everything that can be counted counts,” a line which both defines and explains the soaring appetite for ESG investing.
‘Enthusiasm’ for ESG
If this all sounds a tad esoteric, making what was once considered a niche investment strategy designed to satisfy certain investors’ conscience rather than a guaranteed method of generating above-average returns, recent figures confirm investors’ insatiable enthusiasm for ESG investing.
According to the Investment Association, the net inflow of savings into ESG funds quadrupled in the third quarter of 2020, to £7.1bn ($9.66bn, €7.89bn). Chris Cummings, the Association’s chief executive, described ‘responsible’ investment funds as “a beacon for how savers can put their money to work to support positive change.”
Globally, the value of assets invested in sustainable investment funds reached a record £930bn in the third quarter. Investment on this scale is powered, in part, by a discernible shift in investors’ attitudes, but there’s another, equally important, reason. Since the start of 2020, companies boasting robust sustainable credentials have tended to outperform those that do not possess them.
It seems likely, therefore, that as the coronavirus ebbs from our lives, we’ll witness a more engaged debate focusing on social and ethical awareness which will question and examine how organisations operate and what they produce.
Furthermore, as the government is committed to economic regeneration by injecting billions of pounds to ‘build back greener’ and to achieving net zero carbon emissions by 2050, the momentum behind ESG investing shows little sign of slowing.
For almost 40 years, the suspicion that investing in socially responsible areas carried some form of performance discount has effectively been jettisoned. Today, ESG is no longer thematic but mainstream.
New mainstream investment
Preparing to join the socially responsible investment mainstream is a form of investment considered a close cousin to ESG: Sharia-compliant or Halal investing, still largely unknown in the UK despite recent average annual returns of leading Halal funds exceeding 22%.
Among Sharia law’s broader objectives is a commitment to promote man’s welfare and preserve the interests of future generations. It follows that Sharia-compliant investing goes beyond a rather one-dimensional financial focus by simultaneously concentrating on the welfare of individuals, society and the environment.
Clearly, there is a convergence of values between Halal investing and ESG, a uniting ethical bridge which provides enormous opportunities for investors, introducers and intermediaries.
Much like their ESG cousins, Sharia-compliant funds do not invest in tobacco, adult entertainment, alcohol, gambling, arms and munitions and avoid investments in selected foodstuffs and what, according to Sharia, are considered usurious institutions. They also avoid investing in companies burdened with excessive debt.
This last exclusion has appealed to investors for almost a century, ever since Security Analysis, written by Benjamin Graham, Warren Buffet’s investment mentorm and David L. Dodd was published in 1934. Security Analysis is unambiguous, describing inflated levels of debt as a sign of weakness.
“Financial difficulties are almost always heralded by the presence of bank loans and other [short term] debt,” the duo declare, a stance which resonates with ESG investors.
‘Virtually unknown’
Halal investing remains virtually unknown to UK investors. British Muslims have traditionally had a very limited choice of Sharia-compliant products.
As a consequence, their retirement planning has, in many instances, been neglected.
However, the pension platforms available can offer an effective solution for individuals and employers with Muslim staff.
Moreover, Halal investment models like this also incorporates automatic lifestyling, effectively locking-in accumulated investment growth by gradually switching into less risky funds as investors approach retirement.
This article was written for International Adviser by Christine Hallett, managing director at Options UK.
