One of the few clear aspects to emerge from the general election is that millennials had a big impact on the result — but politics is not the only sphere where this generation, born between 1982 and 2004, has influence. They are also changing the face of the investment industry through a greater emphasis on environmental, social and governance (ESG) issues. This appetite for a new way of investing has fuelled a rise in the value of investments managed in a sustainable way from £7.8 trillion in 2011 to £16.3 trillion in 2016 worldwide.
Millennials are signing up for workplace pensions faster than any other segment of the population, according to the Department for Work and Pensions. Markus Stadlmann, the chief investment officer for private banking at Lloyds Bank, says: “Millennial investors, along with charities and pension funds, are embracing responsible investing. They want to be more ethical in their investments, but they are doing so in a radically different way.”
Impact investing — the new ethical approach
Ethical investing has gone through a three-stage evolution. Traditionally ethical funds relied on a system of excluding whole sectors, such as tobacco, gambling and arms manufacturers, resulting in a restricted pool of stocks in which to fish. Stage two led many ethical fund managers to adopt a different approach, engaging with companies rather than avoiding them, and selecting those that offered positive solutions to issues such as pollution and climate change. In stage three this approach, known as impact investing, has been taken to a different level.
Ben Faulkner of EQ Investors, the wealth manager, says: “It has been adopted by many fund managers who have no specific ethical remit, but simply think that this method of investing can lead to improved performance. It is this combination of solving social and environmental challenges and the prospect of positive returns that attracts investors, especially millennials.”
Among the well-known financial groups that have embraced the approach are Aviva, AXA, BMO, Jupiter, Kames Capital, Legal & General, Liontrust, Royal London, Schroders and Standard Life.
Charlie Thomas, who runs the Jupiter Ecology fund and the Jupiter Green investment trust, says the situation has changed dramatically since he took over the funds in 2003. “At first there was a sense that we were the tree huggers in the corner — a bit outside the mainstream,” he says. “There was little crossover between the stocks we held and those held by other managers. Now about 50 per cent of the stocks in our portfolio are held by other managers and they will often ask my team for their views on particular stocks.”
This appetite for impact investing is being driven by increased interest from the public, led by investors in their twenties and early thirties. Rebecca O’Connor, the co-founder of Good With Money, the ethical money site, says: “Research from Triodos Bank shows that 63 per cent of millennial investors would like their money to support companies that are profitable and make a positive contribution to society and the environment. Sixty per cent would move their money if they found it was being invested in companies that conflicted with their personal values and ethics.”
Impact investing also makes financial sense. Sectors such as renewable energy and electric carsarebecoming mainstream. Mr Thomas says: “In many places, including parts of South America and the Middle East, renewable energy is the cheapest form of power generation. On one day last week, for the first time, more than 50 per cent of the electricity generated in the UK came from renewables.”
How it works
Fund managers and wealth managers who adopt impact investing judge a company by its profit and loss figures, and its record on ESG criteria. The environmental element looks at a company’s approach to climate change, hazardous waste and nuclear energy. The social part examines how a company manages its dealings with staff, suppliers, customers and the communities in which it operates. This would include human rights, consumer protection, animal welfare and attitude to so-called sin industries, such as tobacco and gambling. Governance would cover matters such as executive pay, a company’s regulatory record and its position on shareholder rights.
Mr Faulkner says that EQ looks at the positive rather than the negative side of a problem. It favours companies involved in sustainable transport and renewable energy rather than coal and oil; in water resources and healthcare ahead of tobacco and nuclear energy. Among the stocks that this approach has highlighted is Panasonic, the Japanese electronics company, which is working with Tesla to build what is likely to become the world’s largest battery factory for electric vehicles.
Mr Thomas picks out the German stock Infineon Technologies, a semiconductor company expected to benefit from the demand for electric cars, which will require an increase in output of computer chips. Craig Bonthron of Kames Capital, the fund manager, picks Acacia Communications, the US company that enables fibre-optic networks to run more efficiently and benefits data centres, which use large amounts of energy.
Jason Hollands, of Tilney Group, the wealth manager, says the expansion of impact investing will be driven by charities’ desire for their investments to benefit the community, coupled with demands from institutional investors under pressure to adhere to tighter governance codes.
Then there are the millennials, who will acquire a growing influence as their wealth multiplies. Mr Thomas says: “Over the next 10 to 15 years there will be a massive transfer of wealth from the baby boomers to the millennials and this looks set to create a surge in demand for impact investing. Only about 50 per cent of baby boomers say they want their investments to have a social, environmental or political impact. This figure rises to 90 per cent among millennials — so when they start to inherit substantial sums of money it is likely to trigger a sea change in the investment industry.”
‘A eureka moment’
Tom Harrison, 27, from south London, says he and his friends have embraced impact investing. Mr Harrison, a researcher for a charity, says: “We realise that we can have an influence over how our money is invested and we want it to be used for positive purposes.” His eureka moment came when he looked at his investments and decided that he did not want his money in fossil fuels.
“I was very impressed by the Divestinvest movement, which encourages people to take their money out of fossil fuel stocks and put it into more worthwhile alternatives.
“I decided to invest in the Wheb Sustainability fund. It does its own research and then invests in stocks, which are working in a positive way to combat climate change, such as Vestas Wind Systems, a Danish company, which makes wind turbines, and Shimano, a Japanese manufacturer of bicycle parts.”
‘I have an appetite for impact’
Gemma Godfrey, 33, was the head of investment strategy at an asset manager before setting up her financial website — moo.la — catering for her fellow millennials. She says: “We are predicted to have the greatest spending power of any generation within the next couple of years and my website aims to appeal to millennials and other investors who are interested in financial wellbeing, and being part of a movement that’s changing the industry. As millennials work their way up the financial services industry ladder they will bring an appetite for impact investing to a wider audience.”
For those who want help selecting impact investing funds, Rebecca O’Connor, a co-founder of Good With Money, the ethical website, recommends research from 3D Investing, which identifies 201 funds that have a clear ESG mandate. About 65 qualify for a three-star rating or above. Among the funds with a four or five-star rating are:
Henderson Global Care Growth The 3D research says: “This has been upgraded to a four-star rating. The commitment of the manager to impact investing is much clearer.”
Columbia Threadneedle Ethical UK Equity 3D says: “We’ve upgraded it to a four-star rating as it has the highest proportion of solutions to social and environmental challenges of any UK equity fund.”
INPP, the infrastructure fund, is another to be promoted to a
four-star rating. 3D says: “The proportion of the fund invested in projects that are of direct environmental or social benefit merits the upgrade.”
Assura real estate investment trust (Reit) This developer and manager of surgeries and medical centres has been given a five-star ranking because of its improved financial performance. 3D says: “This gives us more confidence in its ability to deliver expected returns.”