Is orange the new green? It's not all black and white

Environmental campaigns have been splashing the headlines this year with a bold orange tint.  From a surprise confetti shower at former Chancellor George Osborne’s wedding to orange powder protests at high-profile sporting events such as the Ashes test at Lords and the snooker world championships at Sheffield’s Crucible arena, those who want to see a rapid end to our reliance on fossil fuels have certainly been making a lot of noise.

They may be gaining column inches, but is that undoubted success in raising their profile actually translating into action when it comes to making important investment decisions?  Or has the noise failed to convince people to change their ways?

The answer is not quite as simple as you might imagine.  Although there has been a broad move in that direction, it has not been as pronounced as you might expect. Part of this is the difficulty in defining what we mean by ethical investments: the green campaigners might be turning the world orange, but in reality it’s simply not all black and white.

When it comes to investing, ethical considerations have been playing a larger role for some time.  Ethical investing is already becoming more favoured, with fund managers and investment companies changing their focus to be more ESG (Environmental, Social and Governance) compliant.

As to the extent of that shift, the statistics are inconclusive.  Whilst a recent survey found that 57% of investors have at least one ethical investment, that does not necessarily mean that their entire portfolio has an ESG slant.

And different investors will have different definitions of what an ethical investment is. It is commonplace for investors, driven either by personal convictions or stakeholder influences, to avoid certain sectors such as arms manufacturers, tobacco producers, gambling firms and companies which use animal testing.

But are those same investors growing wary of fossil fuel companies and their investment potential, on the back of high-profile protests by the likes of Just Stop Oil? The answer is no, not yet, at least not in any significant way.

There are two main reasons for this.  The first, and obvious, explanation is that large oil and gas companies have performed pretty well over recent years, and this has been a factor in both fund managers and investors retaining them in their portfolios.

The less evident, but equally relevant, factor is that contrary to the protestors’ perspective, it is often these very fossil fuels companies which have been at the forefront of green energy investments, alongside their legacy fossil fuel operations.

Disinvest from the big oil and gas companies, and you de facto starve an important part of the green energy revolution of the funds it needs to make fossil fuels a thing of the past.  No-one said trying to be green was simple; it’s not a zero sum game.

So are the protestors simply throwing their orange powder into the wind?  Absolutely not, and for two very good reasons: even among those for whom ethical considerations are not the top priority, there is an awareness of ethical factors in choosing their portfolio; and given that green energy is going to be the future (albeit nowhere near as soon as the activists would like), there are sound financial reasons to invest in this sector, too.

Even if new licences are granted for oil and gas exploration, the chances are that fossil fuels will face increased taxation, alongside growing government subsidies and incentives for green energy initiatives.  Moving away from fossil fuels may be a long-term prospect, but the focus on longer-term change to deliver returns through more ethically adhered companies could show to be more profitable for investors.

Whilst ethical investing still appears to be a minority interest, there is evidence that ethical considerations are starting to rank alongside security and performance as factors to be taken into account when building a portfolio.

Investment dynamics are shifting.  What some might see as an ‘ethical penalty’ in investment performance during fluctuating market periods, could very well evolve into an ‘ethical premium’ over time.

With a long-term growth perspective, ethical investing not only offers returns but also funnels capital towards building a better world.  It is this vision for a sustainable future, rooted in ESG principles, that will stand the test of time, and ultimately help sustain the profits of these companies as well as provide the return to investors.

These changes won’t make quite so many headlines as disrupting sporting events and blocking roads; but, in the long-term, the end result may very well be the same, and with fewer direct implications for the general public, encouraging positivity around ESG and giving rise to increased numbers of ethical investors.

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