No dollar invested is free from an ethical or moral consideration, whether you’re aware of it or not. It’s no wonder the ethical investing movement is having a moment.
The short version
- Ethical investment is on the rise, but it’s been around for a fair while
- Millennials are driving the change, and they’re a rising part of the investment pool — they’re set to inherit $30 trillion in the coming years
- The number of financial products aimed at alleviating ESG concerns has skyrocketed over 200 percent over the last decade
- Investors can no longer ignore the ethical implications of their investments, as the consequences are visible via social media
The origins of ethical investing
Depending on how you define it, responsible investing as a movement can be traced back to the 1700s when the Quakers decided to get out of the slavery game.
Since that point in time, it’s come back at various times in response to a variety of factors such as a higher awareness of environmental impact or the dangers of smoking — but both the ability and desire to filter investment through an ethical lens has been no more powerful than it is right now.
With every investment there is an impact beyond the dividend returned to you.
For example, you may invest in a company which does great things for the environment — but it’s backed by a major shareholder which also invests in companies which harvest personal data for profit.
Investing, in short, can be an ethical minefield. What was once a fringe investment consideration is now getting its time in the sun.
Those darned millennials
Global investment firm Legg Mason put out a report tapping the opinions of about 16,000 investors (about 1,000 from Australia), and it found that sustainable investing was indeed on the rise.
49 percent of respondents said they selected companies or funds according to environmental, social, or governance (ESG) considerations. This was higher for millennials with 66 percent, but for baby boomers it was just 32 percent.
It seems millennials are far more discerning compared to their baby boomer counterparts – some even want information on the supply chain of their snacks.
There’s a reason every brand and its dog is clamouring to be seen as ethically responsible.
From shaving to footwear, brands are falling over themselves to position themselves as socially responsible.
As millennials move into the market and bring capital with them, they’re becoming a larger proportion of the investing pool.
There are varying estimates of how much money millennials are set to put into the investment pool, but EY has estimated that $30 trillion of wealth is set to transfer [PDF] from baby boomers to their millennial offspring.
It’s really no wonder that the number of investment instruments pitched at millennial investors has rocketed in recent times.
Tracking the rise of exchange-traded-funds (ETFs), the number of options available for millennial investors to buy into the market
The growing demand from investors for socially and ethically responsible investments has prompted a raft of ESG-consideration first funds to crop up.
According to a report put out by JP Morgan, the socially responsible investment market is now worth almost $23 trillion, which is up about 200 percent in a decade.
The same report found there were $11 billion under management in ESG-specific-themed funds.
Not only are there a huge number of outlets for the socially-minded investor to part with their money, but the barrier to investment for newcomers is now as low as it’s ever been.
Traditionally, investors have needed around $500 in a particular stock in order to participate in the market.
Then, there’s additional brokerage and trading fees to take into account.
But a new wave of ETF-backed investment options has emerged for investors to get into the game at a minimum buy-in price — and in fact some providers will provide stock for you to get you into the funnel.
New options such as Robin Hood in the US or Raiz (ASX:RZI) in Australia have been specifically set-up to target investors who may not have a lot of money or are new to the investment game.
In fact, if you’ve listened to a US-produced podcast in the past few months you’ve more than likely heard an ad for Robin Hood — and ESG considerations are part of the pitch.
Their ads make it clear that you can invest in a basket of companies led by a female CEO if you wish to put your money where your ideals are, for example.
It’s clear that the investment community has cottoned onto the fact that ethical investment is indeed a thing, and there’s money to be made from it.
The last question to be answered is why this has emerged as an investment theme.
Out of sight, out of mind?
Ethical investment has only really emerged as a prominent theme in the last few decades.
And it’s only really caught fire in the last decade as millennial investors start to come onto the market — but there’s also been a megatrend which has impacted on our lives in that time: social media.
For better or worse (and that’s highly debatable), social media has opened people to the world in ways never experienced before.
While some may use social media as a source of confirmation bias, it’s also allowed us to be exposed to new ideas and to new scandals.
Once upon a time we may have only heard about the Arab Spring tucked away in back pages of a local masthead, but now we can follow along with a hashtag.
Similarly, it’s becoming increasingly difficult to buy into the cognitive dissonance involved with investing into companies whose activities have an adverse impact on society or the environment.
It’s hard to ignore the effect of confectionary companies’ appetite for palm oil, and what that means for orangutang habitats — when images of deforestation keep on popping up in your newsfeed.
In days gone by, it may have been impossible to track the impact of companies’ activities — but now it’s part of the noise and fabric of our online lives.
The proliferation of this content makes companies more accountable for their actions (and raises the prospect of reputation risk), and also raises the overall consciousness of investment choices.
What does this all mean?
It’s safe to say that ethical investing considerations have emerged and are here to stay — forming a core part of investment decisions.
Whether it’s buying laundry detergent or deciding where to place investment funds, ethics are forming part of the decision-making matrix.
On the back of that, expect to see a lot more noise being made about ethical investing in the future.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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