UAE investors like to invest in responsible companies, without compromising on their returns
Is there a price to pay for investing sustainably?
Investors in the UAE don’t just want to build a big enough pot of money to retire in comfort, they increasingly want to do it ethically as well.
A series of new studies suggest the local appetite for sustainable investing is among the healthiest in the world, far stronger than in the United States or United Kingdom.
Ethical investing, also known as socially responsible or sustainable investing, aims to build a better world, as well as create wealth.
Fund managers do this either by shunning companies in industries they consider damaging, such as energy, weapons, alcohol, gambling, and tobacco, or by actively investing in companies that make a positive impact, for example, in wind and solar energy.
Sceptics argue that there is a price to pay for this in the shape of inferior investment returns, but investors in the UAE reject the idea that they are making sacrifices by taking ethical criteria into account when deciding which stocks, mutual funds or exchange-traded funds (ETFs) to buy.
Some believe ethical investments will outperform, making money and cleaning up the planet at the same time.
Is it possible to do both?
The latest UBS Investor Watch study of high net worth investors found that 93 per cent of respondents in the UAE believe they are not giving up performance by choosing a sustainable investment, against a global average of 82 per cent.
In fact, two thirds of investors in the Emirates said they expected sustainable investments to outperform traditional rivals, against 50 per cent globally. Three quarters expect sustainable investing to be the norm within a decade, although barriers remain, with many saying that sustainable options are not firmly established and may also charge higher fees.
Impressively, more than half of UAE investors have adopted sustainable investing strategies, against just 12 per cent in the US and 20 per cent in the UK. Niels Zilkens, head of wealth management for Arabian Gulf and Non-resident Indians at UBS, says UAE investors are ahead of their peers in Europe and Asia. “They do not believe they are sacrificing returns, rather they feel that the steps many are now taking will become normal practice in the future.”
The positive UAE attitude towards sustainable investing is echoed in a separate report by fund manager Schroders.
Its Global Investor Study 2018 surveyed more than 22,000 investors from 30 countries, and found that investors in the UAE, along with Europe, were least worried that investing sustainably would hit their returns, with just 23 per cent expressing concerns.
They are also backing words with action, as 86 per cent say they have increased allocations to sustainable investments over the past five years, against 76 per cent globally.
Crucially, investors who consider themselves to have greater investment knowledge are more likely to invest sustainably. Some 72 per cent of UAE residents say that a lack of information, advice and understanding is preventing them from investing sustainably, against 57 per cent globally.
Jessica Ground, global head of stewardship at Schroders, welcomed the results but called for barriers to ethical investing to be removed, to improve “availability, transparency and advice around these funds”. Research from HSBC that shows that more than half of investors in the GCC have an Environmental, Social and Governance strategy.
This is the year that ethical and sustainable investing finally went mainstream, after decades on the fringes.
The first ethical fund aimed at private investors, Pax World, was launched in the US in 1971, with Friends Provident Stewardship launching in the UK in 1984.
Now called Pax Balanced and bought by Impax Asset Management Group earlier this year, it has $1.46 billion of assets under management, while Impax manages assets totalling $13.4bn.
The Stewardship fund is now called Aviva Stewardship but remains a relative minnow managing just £200 million (Dh960m). However, socially responsible investing generally has gone from strength to strength, with one dollar in every five invested under ethical strategies in 2016, totalling $8.7 trillion, according to the SIF Foundation, the Forum for Sustainable and Responsible Investing based in Washington. In the UK, sales of ethical funds to private investors topped £1bn for the first time last year.
There are two types of ethical fund, sometimes described as dark and light. Darker green funds have stricter criteria and may limit themselves to companies that have a positive impact on society, such as alternative energy, while turning their noses up at oil, arms, tobacco and so on. A lighter green fund might invest in, say, a fossil fuel company that was “best in class”, for example an oil company working to boost renewables or reduce its ecological footprint.
Camilla Ritchie, lead manager on the 7IM Sustainable Balance Fund, says funds come in every shade of green. “You need to check that the fund manager’s rules match your personal ethical priorities.”
As interest grows, advisers risk losing clients if they fail to acknowledge their ESG preferences, says Jonathan Yousafzai of fund manager Thesis Asset Management. “ESG funds have soared in popularity as investors have woken up to the idea that they can invest in responsible companies, without having to compromise on performance.”
The younger generation is particularly keen and advisers and fund managers need to catch up, or risk losing clients.
Steve Cronin, founder of WISE, or Wealth, Investment & Saving for Expats, an independent community for financial education and support in the UAE, says companies that meet high ethical standards may actually have a competitive advantage and as shareholder and fund manager pressure grows, they should increasingly become the norm. “It is encouraging to see how many people are keen on sustainable investing, though a question remains as to what proportion of their portfolio is being invested sustainably.”
Mr Cronin says investors need a wider choice of cost-efficient funds and asset managers are now rushing to fill this void, but he warns investors to be alert to higher fees, as ethical managers have to spend time and money filtering companies. “This will have an impact on long-term performance but many investors may decide that this is an acceptable price to pay.”
Anybody who is interested in ethical investing must read the fine print very carefully when choosing a fund, because criteria differs says Mr Cronin: “If you are paying extra for sustainable investing, you will want to be sure it actually does make a difference.”
Saints and sinners
Gordon Robertson, director of wealth managers Investme Financial Services in Dubai, warns that investors may struggle to sort out good stocks and funds from the bad, as do many advisers. Good intentions are all very well up to a point, he says. “We all want to invest ethically or sustainably, but we also want to save enough for our retirement.”
Ethical investment funds have performed well lately but in the longer run this sector may still involve financial sacrifices, Mr Robertson says, as demand for “sin stocks” such as energy, banking, armaments, gambling, tobacco and alcohol remains strong.
Another danger of ethical investing is that you can end up with a portfolio weighted to small- medium-sized companies, as these are less likely to fall foul of ethical criteria compared to sprawling multinationals operating in a range of different countries.
Green is good, to revise an old investment saying. Just remember, having enough money in your pension pot is good as well.