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Responsible Investing

16/12/2019 … Author:

There is no doubt that there is a growing awareness and interest in ethical and environmental concerns; people are changing the way they live to reflect those issues.

Veganism, for example is now mainstream where just a few years ago it would have been considered an alternative lifestyle. This is a high-profile example of a growing phenomenon in Western culture, namely the increasing willingness to take action around ethical and environmental issues – often referred to as the ‘Blue Planet’ effect, being a reference to environmental champion Sir David Attenborough’s iconic program of the same name.

Social, environmental and technological change is happening at a faster rate than ever before, affecting the world’s climate, demographics and the way we live. It is no wonder that in light of this, people are assessing the way they invest, re-aligning their investments to better match their values, concerns, and to have a demonstrable impact on the world.

This is certainly an area where there has been growing interest, not just amongst investors but fund management companies as well. An environmental, social and governance (ESG) policy and accompanying fund(s) is now almost de rigueur for any asset manager in the UK market.

But what does this mean for investors in practical terms?

Ethical investing was once seen as very niche, yet these days, responsible investing takes many forms, giving different ways individuals can ‘invest for good’, including the various levels of ‘green’ funds, ESG funds, socially responsible investments (SRI), sustainability funds and impact investing, to name a few. This range of options means investors can more readily find investments that suit or match their views, while also delivering market comparable returns on their investments.

Investment terms

The different types and terms of responsible investing often overlap or work in conjunction with one another. Some funds will talk about, ESG and sustainability in the same breath, while others will use them to differentiate themselves in the market.

Funds following this ethos will analyse how companies interact with society and their environment as well as analysing where and how they make their profits. Sustainable funds can also be focussed on the UN goals and will look at the company in respect of elements such as its reputation, corporate culture, position in the market and long-term future.

Impact investing as a type of responsible investment is more niche, as it can be far more focussed, looking to fund specific projects, such as bringing water producing facilities to an area of Africa. While these are very broad-brush descriptions, as can be seen there are different ways investors can put their money to work. As investors, invariably, we are looking for our investments to make us money as well as to do good.

Performance

One of the key differences between investing for good now and a few years ago is that investment performance does not have to suffer as a result. In the past, strict ethical screening often meant ethical funds trailed behind in performance tables. Nowadays, fund managers tend to adopt a more pro-active strategy, using their influence as stock buyers to engage with companies to make them adopt better practices and actively work to, for example, reduce their carbon emissions, change their suppliers or generally look at their working practices and how they can be made more environmentally and socially responsible.

Importantly, companies that can adapt to the changes – who have clear policies on the UN goals, such as climate action; health and well-being of their employees, consumer and suppliers; gender equality; responsible consumption and production, i.e. those which are often within the ability of companies to influence within their operations – are more likely to thrive, as they will attract customers and employees, thereby growing their business.

In contrast, companies that do not move with the times and continue polluting or failing to adopt inclusive employment policies, are more likely to lose out in a connected world where news of bad practices can be quickly spread. Get it wrong and the cost to reputation and bottom line can be high, as Volkswagen found out when it altered its diesel emissions results. A company that ignores the clear messages it is receiving could risk a large fund manager pulling its investment, with a consequent impact on share price.

Nowadays, investing ethically can often mean investing in the companies which will be sustainable, profitable and potentially the leading companies of the future.

Greenwashing

Some fund managers are warning that given the sudden rush for fund houses, to offer responsible investments, investors need to dig down beneath the surface of each fund to ensure that their commitment to ESG or sustainability is not just a marketing stance.

Individual Choice

Responsible investing can be undertaken in many ways and at many levels. Some investors want to apply a strong exclusion filter to where their money is invested whilst others will look to help effect change in industries by favouring the companies who are making commitments to become more responsible in their culture and operations. It really is down to the individual’s views, concerns and choices.

Lowes sees the rise of responsible investing as a positive movement that has the power to progress change because both investors and fund managers want it. Often it can be pressure from the marketplace, rather than the big stick of regulators and government, that can truly make a difference.

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