Doing Well By Doing Good

17 November 2017 | World Views | AJ Cilliers

Even with a detailed knowledge of the investment environment in the UK, I suspect you would be hard-pressed to name the UK’s best-performing fund in 2016.  Okay, I’ll put you out of your misery - does the Church of England Ethical Endowment Fund ring a bell?  No?  Welcome to the club: I think everyone outside of the church’s inner circle was equally gob-smacked.

Even more surprising is the extent of the fund’s achievements.  Turning in its best performance in 30 years, the £7.9 billion fund produced a 17.1% return from its ethical investment strategy.  When you consider that fund manager Neil Woodford, one of the UK’s finest, achieved less than a fifth of those returns from his Income Equity Fund, you begin to suspect a bit of divine intervention.  Especially as returns like these put the Church of England’s fund among the best in the world last year.

This performance serves as a reminder of the growing interest in ethical investing.  In the UK, more than £15 billion is invested in around 75 local ethical and sustainable funds, a sizeable increase on the £11 billion invested five years ago.

Not that a Higher Power has always guided the CoE’s investments.  Back in the 1980s, the fund lost heavily after the church commissioners, who manage the fund, borrowed big to invest in the commercial property sector.  The timing was hardly heavenly, as the sector crashed only a short while later.  And, a couple of years ago, the Church was in the news again when its investment in payday loans company Wonga was uncovered.  Wonga was accused of exploiting the poor by charging excessively high rates of interest, leading the CoE to issue a hasty apology before dumping its holdings in the lender.

But aside from those two stains on its record, the fund has turned in an excellent long-term performance.  Over the past 30 years it has produced an average 9.6% return per annum, impressive by most standards and well above the average rate of inflation in the UK during that time.  Which of course begs the question: How has this success been achieved?

Edward Mason, head of responsible investment for the CoE, recently told the UK’s Sunday Times that the most important decision concerned the way in which asset managers were selected.  "We look for a manager with a clear investment process, and we look for them to take into account environmental, social and governance factors in the way they make their investment decisions."

The fund steers clear of a number of areas, including armaments, tobacco, gambling, adult entertainment and, after the Wonga experience, lending at high rates of interest.  Mason also emphasised the importance of diversification, explaining that the CoE does not focus only on listed shares, which in fact make up just 40% of their portfolio.  Other areas of investment include about 20% in real estate, 10% in agricultural land, 4% in forestry, and some funds in private equity, among others.

Does ethical investing pay?

Investment research firm Morningstar has investigated this issue, and the answer is an unequivocal ’yes’.  Morningstar’s analysis showed that funds that take a sustainable approach often outperform their less ethical rivals.  The company has developed its own sustainability rating system, which allows investors to assess companies on the basis of how well they manage their environmental, social and governance risks and opportunities.  Turning the spotlight on the UK equity income sector, it found that those with a high sustainability rating produced an average 12.4% return over the past five years, compared to 11.2% for those with a low sustainability rating.

It appears that responsible investing delivers rewards in South Africa as well.  Towards the end of last year Fin24 reported that, just over two decades since SA’s first RI investment fund was launched, both private and institutional investors are placing an increased emphasis on ethical, social, environmental and socioeconomic factors when making investment decisions.

Professor Suzette Viviers of Stellenbosch University, who completed her Doctoral thesis on socially responsible investing in South Africa, has found that the risk-adjusted returns from RI funds match those of conventional funds, and even outperform them in certain instances.  This supports the research conducted by Morningstar on UK funds, as mentioned previously.  Prof Viviers is currently focusing on two responsible investment strategies, impact investing and shareholder activism, both of which are relevant in the South African context.

Activist shareholders can use a number of different tactics to draw attention to poor governance or unethical corporate practices.  These protests can be vocal and public, causing considerable discomfort to the heads of errant companies and often bringing about meaningful change.  And impact investing, a relatively new concept in the financial world, is beginning to make waves on a global scale.

Impact investing

Impact investing suggests that investors can make a positive contribution to societal change, by investing in companies that actively aim to solve social and environmental problems.  And there is no doubt that this approach to investing is gaining momentum. 

Impact investing specialists Tideline have tracked the growth of this investment trend in the US over the past five years.  Their research shows that, back in 2012, of the 20 largest US fund managers only four followed impact investing as a dedicated strategy.  Two others were in the initial testing phase, one was actively considering their involvement, and 13 (or 65% of the Top 20) had no known interest in impact investing.

Fast-forward to 2017, and seven of the 20 biggest US fund managers had adopted impact investing as a deliberate strategy, three were testing the strategy, and three were in the active consideration phase.  Only seven (or 35%) showed no interest at present.

More significantly, Tideline reports that nine out of the 10 largest US asset managers are now active in impact investing, with only second-ranked Vanguard failing to support or actively test impact investing strategies.

What is driving impact investing?

There are a number of factors at play, but the two most important as identified by Tideline are:

  • The biggest players are getting involved.  They seem to believe that, even if a niche market at present, impact investing addresses major societal concerns and will attract an ever-increasing number of investors in future.
  • Secondly, investment managers at large, diversified financial institutions, as well as those at wealth management businesses, have almost all embraced impact investing.  This is in response to a demand for impact investing from high-net-worth clients.  The resultant increase in activity at wealth management firms has been the most significant commercial trend in impact investing in the past five years.

How can investors invest responsibly or with impact?

In the first place, socially responsible investors can use a ’negative screening’ approach to share or fund selection.  Based on their own consciences or beliefs, investors can avoid those companies which produce ’harmful’ products or activities such as tobacco, gambling, pornography, and oil extraction (e.g. via ’fracking’).  Fin24 estimates that of the funds launched in SA between 1992 and 2012, about 20% of them could be categorised as responsible investors.

Those investors who want to take a more active approach to fund and share selection, can identify the social issues important to them and then seek out suitable companies that address these issues.  In all cases, investors should decide with their heads as well as their hearts.  Recent performance as well as future prospects should be considered, as well as the credentials and ability of the people leading the companies concerned.


One cannot be a citizen of South Africa without being aware of the social and environmental challenges we face.  It is therefore heartening to note that, both at home and in the wider world, concerns in these areas are beginning to drive investment trends, and also to produce improved returns to shareholders.

Good things don’t always happen to good people, but it looks as though that might be changing in the world of investing.  And if by doing good we can protect our environment and improve our society, that surely has to be one of the best win-wins around!



AJ Cillers

AJ is an academic and a freelance financial journalist who has written for Sharenet for some 15 years. He spent 25 years as an accountant and financial manager in various South African companies before moving into academia. He has a broad range of interests, including all aspects of business and stock market investing. Apart from a bachelor’s degree in Accounting, AJ holds a Master’s degree in Financial Management. He is also a Fellow of the Chartered Institute of Management Accountants.

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