For some time now, our customers have been asking us to help them invest in line with their values. We know that values are inherently personal, so we wanted to be sure we could truly offer something that would work for a broad range of investors, without compromising performance.
We believe that most people would choose to apply their personal values to their investments if they could, but with no way to truly understand how ‘ethical’ an investment is, most people simply can’t invest this way. So we decided to do things differently.
What’s the problem with ‘ethical’ investing?
Ethical investing has been around for a long time, typically based on excluding investments in companies whose products some people find morally wrong. But unfortunately, the labels attached to these types of investment products can be confusing. For instance, why does a so-called ‘ethical’ fund hold stocks in tobacco companies, or why does a ‘green’ fund hold companies that sell weapons?
This confusion over what’s in a fund, and what’s not, and the lack of information about the social impact of investments can lead some people to feel they can only invest in schemes that have a very clear and narrowly defined goal – like investing in a clean energy plant. But unfortunately, these are often quite speculative investments where the risk is incredibly high and the time when you might get your money back is very long – sometimes 15 years or more.
We know that many of our customers want to invest in line with their values, while still maintaining all the good things we provide, like being able to make contributions on a regular basis and take money out when you’ve hit your goals, in a matter of days, and keeping costs low while diversifying risk across a wide range of investments.
After an extensive period of research in 2015, we decided the time wasn’t right to launch portfolios with a socially responsible (SRI) focus. Instead, we set out clear criteria that we would need to meet before Nutmeg would launch SRI portfolios.
- Find a way to demystify socially responsible investing by listening to customer feedback and build portfolios that would allow a broad range of people to invest in line with their values
- We would have to be confident that future performance would be comparable to our current managed portfolios
- Fund costs would have to be competitive versus our normal portfolios
After a lot of work, we’re now confident that we have more than met these criteria. Our approach, developed out of our ethnographic approach to user design is to focus investments on companies that are working to a higher standard of social responsibility, rather than just excluding some companies, and to introduce a radical new level of transparency on how these portfolios score against environmental, social and governance criteria – often collectively called ‘ESG’ .
We’re working with one of the world’s leading data and analytics companies, MSCI, to calculate scores for all our investments in accordance with ESG criteria. Not just our new socially responsible portfolios, but all of our portfolios. We’re the first wealth manager in the UK to do so1. We’re used to seeing what our food contains, so why shouldn’t it be true of investments as well?
We’re also confident that the future performance of investments managed with a focus on social responsibility should also be comparable to other investments without this approach. Costs have also come down this year, too2.
We believe our new portfolios are the best way to invest sustainably in the UK today – highly diversified, managed risk, low-cost and efficient, while also seeking to achieve a high degree of social responsibility.
As part of our new approach, we’ve signed up and committed to the United Nations’ sponsored Principles for Responsible Investing.
A wake-up call for the industry
We hope our approach will serve as a wake-up call for the wealth management industry. We’ve taken the first step towards being transparent about the sustainability of your investments, but as we continue to evolve our approach, we want to start a broader conversation about how to make socially responsible investing work the way investors want it to.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.
2. Nutmeg data – analysis of underlying fund costs