Are ethics a luxury in a downturn?

All good things come to an end. The lengthy period of rising share prices is over, at least for a while. Returns are down and investors are worried. With high cost of living, inflation and uncertainty ahead, they are reviewing their investments. Many are asking whether investing ethically is still good financially as well as being good for people and our planet.

There are few certainties ahead, but we should not expect future returns to be as high as in recent years. With the exception of a short-lived COVID-induced downturn, share market returns have continuously risen since the downturn in 2008. Average share prices have risen by 570% over those 14 years.

During that period, there was a massive rise in funds claiming to be ethical or responsible, at least partly driven by research showing the returns for ethically-managed funds has been as high or higher than conventional funds.

However, since the peak at the end of the year, prices of global shares have fallen by more than 20% and there may be more to come. There are serious challenges ahead, including the destructive impacts of climate change. It took over five years for markets to bounce back to the previous high after the downturn during the Global Financial Crisis in 2007-8.

There is limited research and evidence on the performance of ethical funds in a downturn. However, the Mindful Funds – those considered ethical in Mindful Money’s analysis – were resilient during the COVID downturn, and their losses were lower than the market average. This was also reflected in research undertaken by Morgan Stanley showing higher returns from ethical investment. We are already seeing a number of Mindful Funds performing relatively well in recent months.

We have no crystal ball to forecast the depth or duration of this downturn, but we have seen no evidence to suggest this is a time to give up ethical principles. Far from it. The risks from climate change have never been so urgent and the opportunities remain attractive.