A guide to
SOCIALLY RESPONSIBLE INVESTING
Building wealth for the future is important. But, increasingly, people want their investments to do more than make money.
This guide is designed to introduce the key approaches to socially responsible investing and how they are relevant to the day to day business of investing. The human impact on the environment means changes to the way society and industry operates are necessary, while societal problems such as poverty and inequality need to be tackled. Choosing investments that take account of these issues is socially responsible investing.
WHAT IS SOCIALLY RESPONSIBLE INVESTING?
An approach to managing assets that sees investors include environmental, social and governance factors as well as financial returns in their decisions about what to invest in. It aims to combine better risk management with improved portfolio returns, and to reflect investor and beneficiary values in an investment strategy. It complements traditional financial analysis and portfolio construction techniques. This is often used as an umbrella term that encompasses various approaches.
WHAT APPROACHES ARE THERE TO SOCIALLY RESPONSIBLE INVESTING?
WHAT IS ETHICAL INVESTING?
Ethical investing focusses on aligning the ethical values of an investor with the investments within their portfolios. An ethical investment is mainly guided by ethical codes, religious beliefs or personal values and is often carried out using exclusionary screening. Examples of possible exclusions include areas that are deemed to be harmful to society and the environment, such as weapons, gambling, tobacco and coal mining.
WHAT IS NEGATIVE SCREENING?
Avoiding investing in companies engaged in what are perceived to be harmful activities, such as tobacco, gambling or manufacturing weapons.
WHAT IS POSITIVE SCREENING?
Rather than avoiding investment in certain areas, each sector is assessed for opportunities to invest in companies which focus on specific ESG themes or exhibit stronger ESG characteristics than their industry peer group. This can be implemented through thematic investing or best-in-class.
WHAT IS ESG?
Environmental, social and governance (ESG) factors are non-financial considerations that inform investment decisions based on an assessment of the risks these factors pose to investments. ESG is not only about what a company manufactures or sells, but also how it goes about it.
ESG integration includes the consideration of ESG factors in investment analysis and investment decisions. ESG integration can be considered to be the analysis of all material factors in investment analysis and decision making.
Takes into consideration the impact companies are having upon the planet today and in the future.
Pollution, waste and emissions
Raw material sourcing
Native bio-systems and species
Renewable energy and efficiency
Takes into consideration the social impact companies are having upon people in the world.
Workers conditions and rights
Takes into consideration the interests of all stakeholders affected by the company's activities.
Equality and diversity
Fair treatment of labour
Health and safety
An investment approach that includes investments on the basis of specific themes. Examples of themes include investing for clean energy, energy efficiency solutions, healthcare solutions and financial inclusion.
WHAT IS BEST-IN-CLASS?
An investment approach that focuses on capturing sector-leading companies when measuring certain sustainability criteria. This approach seeks to identify the best company within a sector rather than excluding the sector as a whole. An example would include investing in the most energy efficient or lowest carbon energy provider.
WHAT IS STEWARDSHIP OR ACTIVE OWNERSHIP?
Stewardship is defined in general terms as the responsible management of something entrusted to one’s care. In
terms of investing, stewardship typically aims to promote the long-term success of companies through monitoring
and engaging with their strategy, performance, risk, structure, and corporate governance, including culture
and remuneration as well as social and environmental issues. The goal is to enhance shareholder value and help
companies to achieve their potential, as well as leading to long-term benefits for society and the economy. It will likely involve a significant dialogue between investor and company and actively voting at shareholder meetings.
WHAT IS ENGAGEMENT?
Purposeful dialogue between investors and companies on ESG and other matters in order to promote responsible
business practice. Engagement can help drive positive change as well as enhance an investors’ research, providing
insight into company strategy, competitive positioning and efforts to manage risks and opportunities.
WHAT IS THEMATIC INVESTING?
Engagement can be a powerful tool for bringing about positive change
As an investor in a company, you can engage with a company’s management by exercising your voting rights at shareholder
meetings. These events can bring a material change to an organisation, by voting on resolutions that impact the way in
which the company is operated, such as the appointment and remuneration of board members or financial considerations such as dividend approval or rights issues.
Where an investor excludes investment in activities which are not compatible with their values, this approach may reduce the
number of possible investment opportunities available to the investor. Limiting the number of opportunities by excluding certain sectors or stocks according to any factor can incur an ‘opportunity cost’, in terms of the potential performance foregone.
Yet there is evidence that some responsible investing approaches can lead to higher shareholder returns. Businesses that address short term risks whilst adapting to longer term structural trends should have more chance of success than businesses that don’t. Poor environmental, social and governance practices, may ultimately be harmful to a business. Socially responsible investing means favouring companies that value long term business sustainability, not just short term profitability, and in the long run that could lead to better long-term returns for shareholders.
This is why we believe investors should be conscious of ESG factors when assessing investments. After all, to ignore them could mean not fully assessing the risks to which an investment is exposed. Companies are also aware there is increasing emphasis on transparency and high standards that go far beyond the traditional financial metrics on which investors have historically focused. Ultimately, this affects the extent to which they can attract capital and the rates at which they can borrow, so they have a vested interest in improving their business practices. The more people invest responsibly, the greater the pace of corporate change.
By taking ESG factors into account, investors are likely to deliver better results – both in terms of long-term shareholder returns and environmental, social and governance impacts – which is why this form of investing is becoming more prominent. Indeed, we believe it will soon become standard practice for ESG characteristics to be considered prominently
alongside traditional financial metrics.
DOES SOCIALLY RESPONSIBLE INVESTING MEAN GIVING UP RETURNS?
It is important to remember there is no such thing as the perfect fund or company. We hope that this guide provides a helpful framework for determining what socially responsible investing means to you, and how you may want to apply this to the funds and companies in which you invest.
The approaches highlighted in this guide are not mutually exclusive, they are complementary, meaning that as an investor
you can decide for yourself which approach, or combination of approaches, best fit your own values.