Analysts say it’s becoming more difficult to make a case for investing in companies that have been deemed to have ethical issues.
The key takeaway from a recent study by the World Economic Forum and The Guardian (UK), which analysed data from more than 1,000 companies, is that ethical investing has become an increasingly attractive strategy for both companies and investors.
Companies that are perceived as “high risk” are more likely to get “disliked”, said the study’s authors.
This can lead to a “sensible investor” taking a “riskier” stance, or even buying companies that are “too risky” for the current market.
The findings are consistent with the latest evidence from the Oxford Dornsife/Harvard Business School’s Business Research Institute (BRIC), which has tracked the rise in ethical investing over the last five years.
In 2014, BRIC surveyed nearly 5,000 investors, including a small group of high-profile investors and a few top-performing companies.
In its report, BRICA said ethical investing “has become increasingly attractive” to investors because it allows investors to take on a “reasonable amount of risk”.
In the report, the BRIC researchers found that the proportion of companies that were rated “low risk” had increased by 15 per cent since 2014, and the proportion that were “high” had grown by 25 per cent.
Companies with “high ethical risk” were rated by investors to have a higher return on investment than companies that scored “low ethical risk”, and that the return on equity (ROE) for high-risk companies was around 3 per cent, compared to the return of low-risk investors.BRICA noted that while ethical investment can still be viewed as risky, its overall quality has improved since 2014.
“Companies are now better at recognizing ethical risks and responding appropriately to them,” the report said.
The report also said that investors are more willing to take risks in high-value sectors, which could potentially pay off in a long-term investment.
“This has led to more aggressive investment in sectors with high ethical risk,” the researchers wrote.BRIC also said a lack of investment in high risk companies could potentially have negative consequences for the sustainability of the global economy, and that investors should “invest in companies with a more sustainable future”.
But the study highlighted that ethical investments are not just for risk-averse investors.
“Ethical investing has potential to be a valuable investment for those who are seeking to diversify their portfolio,” the study said.
“In the past, ethical investments have been primarily focused on risk-free, high-yield, short-term investments that have yielded high returns and are suitable for high net worth individuals,” it added.
While investors who have invested in companies rated “high moral risk” have seen their returns improve over the past five years, “ethical investors” have lost out because of the increasing number of companies deemed to be high ethical risks.
“For these investors, investing in ethical companies has become a more risky strategy,” the BRICA researchers said.