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Are institutional investors becoming more ethical?

Ethics and transparency have always been at the centre of what we do here at Affinity Capital – and it appears our approach is catching on in the investment world.

Many might say investors are hardly known for putting ethics first, but recent research from PricewaterhouseCoopers (PwC) suggests change is on the horizon.

The Big Four professional services firm revealed that 70 per cent of institutional investors would reject a co-investment if they had environmental, social or governance concerns.

Furthermore, 97 per cent of respondents said they predict responsible investment to become increasingly important over the next two years. The top issues driving change are fiduciary duties, corporate values and reputational risk.

Among the institutional investors polled were large pension investors, such as the UK Universities Superannuation Scheme and the Swedish Pension Funds. Major asset management investment companies also offered their views.

Institutional investors are prioritising ethical projects.Ethical investment is becoming more popular.

What’s causing this ethical shift?

Phil Case, director of PwC and specialist in responsible investment, believes there are several factors at play that could be guiding a more ethical stance among professional investors.

“Since the financial crisis, investors are under ever greater scrutiny regarding their wider environmental and social impact and purpose,” he explained.

“The expectations of regulators, policymakers, NGOs (non-governmental organisations) and the general public for investors and their advisers to behave responsibly and deliver more than simply financial return are much higher than before, and are here to stay.”

His comments tie in with recent academic research from Professor Deanne Den Hartog of the Amsterdam Business School, who said the global economic downturn was a key turning point for ethical leadership worldwide.

She argued that honest, open and transparent companies can reap the benefits of better industry partnerships and stronger staff relationships. Professor Den Hartog said the financial sector is an area where the issue of ethics continues to be important due to a number of scandals in recent years.

Markets adapt to demand

As socially responsible investors (SRIs) show an increasing appetite for ethical investment vehicles, major banks have shifted their offerings to cater to this demand.

97% of investors say responsible investment will become increasingly important over the next 2 years.

Structured Retail Products (SRP), an online resource covering both retail and institutional structured investment in the UK, reported in April that ethical products started as a niche market at the turn of the millennium. However, since then, they’ve steadily gained momentum.

Heike Reichelt, head of investor relations and new products at the World Bank, said both providers and investors recognise the value of expanding their horizons into ethically driven areas.

“One of the reasons we are putting so much effort and focus on green bonds is to create awareness for the need to finance these sorts of activities,” she told SRP earlier this year.

However, Ms Reichelt was quick to point out that issuers must still make sure the risk-return and financial aspect of ethical investments are appropriate to encourage SRI activity.

The future of ethical investment

Clearly, ethical attitudes among investors are on the rise, which could have interesting implications for structures and other asset classes.

According to PwC, 83 per cent of institutional investors now have responsible investment rules in place for private equity spending. It may not be long before similar policies are widespread across the entire investment spectrum.

One of the key benefits of structures is the ability to tailor your investment to meet your specific portfolio objectives, which could bode well for those hoping to mitigate risk while pursuing socially responsible causes.¬†Wherever the future may take us, Affinity’s grounding in transparency and honesty means we view this ethical step forward as a positive shift for investments in general.

If you are an institutional investor looking to know more about Affinity Capital’s range of services regarding structured investments, please contact us today.¬†

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