By Umer Suleman, UK General Manager for Wahed, shares his insights
Amidst pandemic-driven market volatility, the past year has seen the emergence of new drivers of the global economy, with ethical investing and tech innovations set to shape the coming year and beyond.
Although anxieties around potential COVID-19 variants linger, investment leaders will be looking for ways to build long-term economic resilience. What will we see next year regarding future trends for the ethical investment space? We explore below.
1. The rise of value-based funds
There has been a rush towards thematic tech investing, with people flocking to invest in funds themed around cybersecurity, electric vehicles, robotics, and cloud computing. In the U.S. alone, thematic funds grew to over $160 billion in assets, from about $49 billion at the end of 2019.
This reflects that investors want to direct their money in more niche ways, which could be a boon to faith-based or value-based funds. Historically, these have been relatively small but are now becoming much more prominent.
While some people might come into value-based investing based on their faith, more and more investors are generally putting their funds towards more socially and environmentally responsible avenues. Specifically, 2021 saw one-third of global equity inflows go into Environmental, social and governance (ESG) funds, bringing ESG firmly into the mainstream.
2. The continued outperformance of ethical investments against traditional funds
Regarding ESG funds, Morningstar has shown that environmentally sustainable funds have outperformed traditional funds across the board, not only over the COVID-19 pandemic but also during the decade beforehand.
After looking at 745 sustainable funds and comparing them against 4,150 traditional funds, they found the ethical funds matched or beat returns in all categories, including bonds or shares, UK and abroad.
Across a decade, the average annual return for a sustainable fund invested in large global companies has been 6.9% a year, while a traditionally invested fund has made 6.3% a year.
During the pandemic, companies that scored high on ESG generally fared well, as they are typically managed well, treating stakeholders well, with lower controversy levels and more conservative balance sheets.
3. An increase in women investment leaders
Women are leading the growth of Environmental, Social and Governance (ESG) investing in the U.S. and have been reported to hold a generally positive outlook toward this growing investment trend.
Specifically, 74% of women fund managers are planning to grow their share of ESG investments in their current portfolios and are more likely than men to have an interest in learning more about ESG.
When it comes to social factors, women ranked the most important elements for them as human rights (80%), workplace health and safety (75%) and social justice (64%), which were only heightened by the events of 2020, which brought social justice and overcoming systemic racism into focus.
4. More regulation over Buy Now Pay Later
This rapid growth has come with new worries and moral questions around whether the proliferation of such services helps or harms these consumers in the longer term.
This is especially timely since the pandemic has left 20 million people reporting financial struggles. We’re likely to see more regulation over BNPL providers in the year to come, alongside broader awareness of their propensity to increase long-term financial stress.
5. Growth of equity-based fintech alternatives
When it comes to financial stress, 3.5 million people say they are close to falling off a financial cliff after the pandemic. To reduce the stress of debt, there has never been a stronger case for equity-based FinTech alternatives, and there are a few exciting developments in this area.
In the mortgage space, an American company called Unison is pioneering co-ownership, helping homeowners finance their property without adding debt. It means that people simply buy back the remaining part of their house whenever they want.
This shift towards equity automatically decreases general stress levels as with an equity arrangement; you own however much you own without the same repayment stress that comes with debt-based arrangements.
All in all, it is set to be an exciting new year ahead as ethical investments only continue to grow in breadth and popularity. It is not just good news for 2022 but also for the years well beyond.