COVID and investment returns in a new ethical world

As the Summer Olympics began in Tokyo without spectators for the first time in history due to Covid-19 restrictions, a recent rise in infections shows no signs of Covid abating as the Delta variant spreads through unvaccinated sections of the population.  Thinking about where the world is at, I decided to pop into my local supermarket to replenish my wine supplies (my thought process linking how the world is with buying more wine!) and whilst gazing at the seemingly endless options I spotted a very nice-looking bottle of blush.  Upon closer inspection I noticed the label … ‘ethically sourced, ethically made and ethically committed’ … intrigued to find out how it might taste, I made my way to the tills with my very first bottle of ‘ethical’ wine – and there it is sat on my desk at the office!

That got me thinking about my next editorial and how the world is changing.  Last year I researched an asset class that I had not considered for many years, mainly due to poor performance historically.  I have to say I was pleasantly surprised at what my research revealed.  The asset class has moved on, and I think it’s also fair to say that investors attitudes to ‘doing good’ in the world have also changed over the last few years.  But what does ‘ethical’ mean in the world of investments?

There are three elements to a set of standards known as ‘ESG’ when considering investment in a company that is looking to make a change in the world:

ENVIRONMENTAL – considering how a company performs as a steward of nature.

SOCIAL – examining how it manages relationships with employees, suppliers, customers, and the communities where it operates.

GOVERNANCE – looking at a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Where possible, as part of our commitment to socially responsible investing, we now include ESG funds within our portfolios to give our clients the opportunity to drive change.

So how does this link to Covid?

The pandemic came with a price for everyone, notably the young and ethnic minority groups. But it is now well established that women also paid a particularly high price.  Women tend to dominate employment in the service-based sector.  They are more likely to work in industries that require face-to-face interaction – retail, hospitality, travel, airlines, self-care and education. From receptionists to air hostesses, it’s work that cannot be done from home. Now consider the fact that the UK is a service-based economy, with 80% of its output coming from this sector.  This is not just a UK issue either, according to the United Nations, if not carefully managed, the economic and domestic turmoil of the pandemic could wipe out 25 years of increasing gender equality as women working in the service industry lose their jobs.

Fidelity International have recently looked at the experiences and views of women internationally, across six markets in the UK, Europe and Asia and asked “Are you an investor?” and found that only 33% of women see themselves as one. The sense that investment is a man’s terrain was true in every surveyed market, apart from China, where 60% of women see themselves as investors.

So why is China so different?

There’s an investment takeaway in all of this – the “S” and “G” of ESG. The ‘social’ part of environmental, social and governance investing is the hardest to define and quantify, but in a post-Covid world, it is increasingly important.  Having diversification in a business at Board level to avoid ‘group think’ has opened up opportunities for women and is one of the considerations under the ‘Governance’ criteria of ESG investing.  Fidelity are starting to vote against Directors of companies who do not have at least 30% of board positions held by women.  From closing the pay gap to promoting more women to senior levels there is a silver lining for women under ESG guidelines, the pandemic has made working from home normal. That’s good news for women, who tend to choose jobs that fit around their children, or elderly relatives, with more manageable hours and shorter commutes.

What kind of returns can investors expect from ESG funds?

One of the ESG funds that we include in our portfolios invests in companies focused on reliable, clean & affordable energy supply.  The returns from this fund at the time of writing are as follows:

PERIOD                     ANNUAL RETURN

1 Year                        56.57% pa

2 Years                      39.12% pa

3 Years                      22.35% pa

5 Years                      24.85% pa

Since 03-2013         15.20% pa

If you don’t already hold ethical funds within your portfolio, now is the time to reconsider because companies that are ethical tend to naturally be well run strong companies to invest in.

For example, Tesla, known for its fully electric cars, amazing technology and ground-breaking batteries, will not accept Bitcoin as payment, citing environmental concerns as the reason why.  The “mining” process behind producing new bitcoins is staggeringly carbon intensive, to the extent that Bitcoin consumes more electricity on an annual basis than nations such as Switzerland and Israel. The higher the Bitcoin price rises, the more carbon it produces.

As evidence that an asset’s environmental risks can also pose financial risks to investors, mounting backlash against Bitcoin’s environmental impact has sent its price spiralling down.  If you hold Bitcoin and are wondering why the price has dropped recently, this is one of the reasons.

China, the world’s largest producer of Bitcoin, is also clamping down. Though it has long made moves against cryptocurrencies, perhaps the most drastic signal of China’s intentions came in May 2021, when the government confirmed a ban on transactions. Officials in China’s four major mining regions have banned the production practice outright.  Environmental concerns are part of it – by far the world’s biggest electricity consumer, clamping down on Bitcoin mining is a sure-fire way for China to cut emissions.

One thing I can say with certainty, is that trading in Bitcoin is, for now at least, pure speculation. It serves little material function and offers no income. With little in the way of fundamentals behind it, its price is susceptible to all kinds of influences.  A lack of regulation is the other issue with crypto currencies generally, and the Financial Conduct Authority reminded UK investors earlier this year of the potential to “lose all their money” when ‘investing’ in this asset.

At Speed Financial Solutions, our focus is to balance risk and return for our clients.  If the bulk of your portfolio is invested in one or two underlying investment funds, the risk versus return ratio is unlikely to be diversified sufficiently to minimise risk and maximise returns.  If you would like us to review your existing portfolio, whether it’s pension, investment or regular savings please contact admin@speedfinancialsolutions.com