Scottish Widows to drop investments from firms who fail ESG tests

Will other investment companies follow suit in dumping stocks in non-'green' businesses?

When I first started writing about money, back before the global financial crash, there was a certain sniffiness about the idea of ethical investing.

It was treated somewhat dismissively, a minority pursuit for a small number of investors with few real options and the inevitability of accepting a mediocre return on their money.

Things have certainly changed since then, with far greater interest, and a much-improved range of options, for investors who put a premium on the environmental, social and corporate governance (ESG) activities of the businesses they invest in.

What’s more, if you invest with one particular firm then your portfolio may have just become more ethical and environmentally friendly, without having actually done anything.

Turning your back on problematic investments

Earlier this month, Scottish Widows announced it was divesting at least £440 million from businesses which have failed to meet the ESG standards set by the firm.

In other words, Scottish Widows is unimpressed by the sustainability of their business practices and is making its exit from them.

It said that it is now working with its fund managers to begin divesting from firms that “pose the most severe investment risk” due to the nature of their businesses.

Scottish Widows has decided to shy away from firms which bring in more than 10% of their revenue from things like thermal coal and tar sands, manufacturers of controversial weapons and those who have violated the UN Global Compact on human rights, labour, environment and corruption.

Maria Nazarova-Doyle, head of pension investments at Scottish Widows, said that as a large institutional investor, it had a duty to shield its customers from ESG investment risks, and could influence “positive change” through the investments it holds.

New to investing? Learn how to get started with Hargreaves Lansdown

Going green

It’s worth reflecting on the fact that 2020 has been an interesting year as far as ethical, or ‘green’ investing goes. 

The amounts of money going into these funds is hitting new highs all the time.

According to data from Morningstar, in the third quarter, the European sustainable fund market had almost £800 billion of assets under management, a 10% increase over the previous quarter. 

Clearly, there is a real appetite for investing in funds that are marketed as sustainable or ethical.

There is also substantially more choice, with funds that fall into this category being launched all the time.

Investment firms aren’t stupid ‒ they are launching these funds precisely because they see the demand for them, they realise that investors are a little keener to know exactly where their money is going.

And then there are the returns.

A study by Moneyfacts earlier this year compared the returns from ethical funds and non-ethical rivals over the 12 months to the start of July, a period that you could charitably describe as volatile.

While non-ethical funds saw their values drop by 1.5% over that period, the 140 ethical funds saw an average growth of more than 4%.

Even looking over longer periods, whether five years or fifteen, the ethical funds outperformed.

The idea that you have to sacrifice returns if you focus your investing on ethical outlets is cobblers.

New to investing? Learn how to get started with Hargreaves Lansdown

What does it mean for you?

Make no mistake about it, the Scottish Widows policy makes a big difference to an awful lot of people across the country.

Scottish Widows reckons it will impact the investments of around six million investors, with the exclusions applied across life and pension funds, and even its index trackers.

From small investors putting a few quid aside every month, to those with beefy investment pots, that’s a lot of investors whose portfolio is now a little bit more sustainable, a little bit more ethical.

This is good news for a couple of reasons.

Firstly, it’s very welcome that people can feel more comfortable about where their money is going when investing in Scottish Widows funds, knowing that the cash is going towards firms that behave in a more responsible way.

But it also sets the tone.

If one massive investment firm is throwing down the gauntlet, and insisting that businesses raise their standards if they want to attract investors’ cash, then others are likely to follow suit.

That’s how it becomes a movement, how investing in a ‘green’ way stops being the alternative and starts being the mainstream approach.

*This article contains affiliate links, which means we may receive a commission on any sales of products or services we write about. This article was written completely independently.