Ethical investing will be a focus for many in the industry this week as Good Money Week kicks off. Investors are becoming increasingly aware of not just the returns on their investments, but also on where they are investing and how their choices might impact on society at large. As the ‘conscientious generation’, we’d expect investing ethically to be high on the wish-list for many young people in particular. But how much of a priority is it for the younger generation and how are widespread problems with access to information and lack of engagement hindering it in the long term?
Research shows there is a definite interest amongst young people in ethical investing, at least theoretically. Triodos Bank (which focuses on sustainable banking) found that 40% of 18-34 year olds planned to remove ‘bad’ investments, such as fossil fuels from their portfolios in the next 12 months; amongst the general population this figure was 10%, so there is a clear appetite. This figure is also slightly higher amongst men. Equally, a study by the Charities Aid Foundation revealed that 79% of affluent investors under the age of 40 had some portion of their portfolios allocated to socially conscious investments – again this compared favourably with older generations (who were only allocating 57%). Figures released this week by UKSIF further underline this – 58% of people under 35 are keen to receive annual updates from their pension fund on their environmental and social impact. So it seems that once young people are on the investment treadmill, engagement in ethical investing is high – and is likely to remain so.
So this is a start, but it’s not quite that simple. Currently, many pension funds invest heavily in what what could be termed ‘unethical investments’, such as carbon intensive fuels – which feature prominently in the FTSE100 – and while more ethical investment strategies are on the rise, they are still a small part of the market. Overall, the size of the market is estimated to be £3.25 billion (Ethex, 2014), but this is still small change compared with the overall figure for investment funds in the UK, which stands at £1.5 trillion.
Moreover, engagement levels amongst young people with financial services are low and understanding and trust in providers is lower still. This also translates to ethical investing. A report by the Green Alliance in August 2014 supports this, drawing the damning conclusion that Generation Y has very little interest in either long term saving or challenging unsustainable investment practices. According to the report, a major problem was a combination of lack of trust in providers and lack of understanding of how financial products worked, which meant that young people were overwhelmingly keeping their money in cash.
Apathy also plays a part. While the Triodos research found that 86% of investors would switch provider if they discovered there was unethical investing going on, the paradox is that many don’t actually have much of an idea where their money is being invested. Furthermore, as only 39% have ever switched a current or savings account, the jury remains out as to whether this would actually tip them over the edge and switch.
As so often happens in financial services, good intentions are hampered by lack of clear information and poor consumer understanding. A study for last year’s Good Money Week by TD Direct Investing found that 57% thought they would need more information about stocks’ performance in order to make an informed decision and 42% struggled to find any details about specific shares in a fund. Another problem, especially for young people is a lack of disposable income, given the bleak environment for young people starting out today – poor employment prospects, high levels of indebtedness and difficulty getting on the housing ladder. After all, it is hard to fully engage with something you are effectively shut out of. Can anything really change, and will ethical investing ever really hit the mainstream amongst the young?
Auto-enrolment clearly marks a huge opportunity for ethical investing. As more and more of Generation Y enter the savings market, the hope is that they will take more of an interest in their portfolios and ensure they align with their social and ethical conscience. The other issue is how ethical investing is defined in a portfolio: while many would view investments such as tobacco companies and those that are involved with animal testing as ‘unethical’, there are grey areas, which would be ethical for some but not others.
On the plus side some investors – including Audrey Ryan at Kames Capital who runs the Kames Ethical Equity fund – are fighting the cause in the best possible way – performance. Ryan’s fund, which screens out many investment areas entirely using its dark green ethical screening system, has no exposure to companies which derive the majority of their revenues from armaments, animal testing, tobacco or alcohol, among other industries. However, this has not stopped the fund outperforming mainstream UK funds over the past five years.
Therefore, the will to invest ethically is clear amongst young people and is a real opportunity for the industry to win back trust and boost their flagging reputations. However, more needs to be done to ensure consumers are getting the information they need to make the right decisions going forward.