Letter to the FT, printed 28 May 2018 It is great to see such positive traction for sustainable investments as reported in your piece (“Ethical funds reach record high in the UK”, May 24), especially given their potential to outperform. However, it is important to understand the difference between ethical investments and those that screen based on environmental, social and governance criteria. Ethical investing is a values-based decision. It is generally made regardless of the impact on a portfolio’s risk/return characteristics. This approach typically excludes entire sectors from a portfolio, such as tobacco, controversial weapons, fossil fuels or pornography. By contrast ESG investment looks at how companies are run, differentiating between companies in the same sector. The portfolio effect of these two strategies can be markedly different. Importantly, ethical exclusions do not necessarily improve the ESG characteristics of a portfolio, and ESG does not compromise return potential versus mainstream investments. As the world moves towards a more “sustainable” economic and social model, ESG screening can help identify how aware companies are of the risks and opportunities this transition presents. And, over time, it can tell us who is adapting and who is not. Why is this important? Well, if you’re in a car heading for a brick wall, the sooner you apply the brakes, the better your chances of avoiding major injury or avoiding the wall altogether. This is what ESG investing helps us do. As such, I would contest that the trends highlighted in your article show investors are looking to invest in ethically sound businesses. They are, in fact, investing in businesses that are geared towards the return drivers of the future. And that is just sound investment.
Emma Cusworth West Meon, Hants, UK
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