An introduction to responsible investing
A common question that you are likely to be asked now when you speak to your investment advisor is your attitude to sustainable investing. ESG is a term you will hear on a regular basis. It stands for Environmental, Social and Governance.
Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example.
Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
From the investors perspective you might ask what this means. It effectively means picking investments based on principles as well as profits. These considerations are largely hard to quantify and don’t translate to a quantifiable figure in your portfolio. The cost of bad industries are felt and paid for by people, society, and the planet over decades.
For a long time, the sustainable investing approach was considered more admirable than profitable. But not any more. The number of responsible funds is growing and so too is evidence that they can actually post superior returns. There is a return now in sustainable companies.
It’s a common misconception that investing responsibly means accepting lower returns. The argument goes that since responsible portfolios exclude sectors such as tobacco and arms – which are unethical, but profitable – they can’t hope to match non-responsible portfolios for performance.
Increasingly, though, evidence says otherwise. A responsible investor may have a reduced pool of investments to choose from, but they’re also less likely to invest in companies that suffer stock-price hits from scandals or fines. Similarly, responsible companies typically have more sustainable business models, and are better positioned to adapt to long-term challenges, such as climate change. They tend to be progressive and innovative.
How do I invest responsibly?
There’s no single, universal way to be a responsible investor. What is and isn’t ‘responsible’ varies from investor to investor. A company one person considers ethical might be considered harmful by another – and vice versa. So firstly, it depends on your principles, and what you’re happy having in your portfolio.
It also depends on your approach to investing. It is now part of the investment discussion to get your view on sustainable investing. You will be brought through a series of questions to determine your views. Once established you will be brought through a series of responsible funds. All the main providers are now listing sustainable funds in their portfolios. These funds contain a wide range of ethical companies and are in the main strong and innovative businesses. They tick the boxes under the main ESG headings as follows;
ESG investors seek to ensure the companies they fund are responsible stewards of the environment, good corporate citizens, and are led by accountable managers.
Environmental
Environmental issues may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. ESG considerations can also help evaluate any environmental risks a company might face and how the company is managing those risks.
Considerations may include direct and indirect greenhouse gas emissions, management of toxic waste, and compliance with environmental regulations.3
Human influence is unequivocally to blame for the warming of the planet and some forms of climate disruption are now locked in for centuries, according to a report from the U.N. Intergovernmental Panel on Climate Change.4 “This report must sound a death knell for coal and fossil fuels before they destroy our planet,” said United Nations Secretary-General António Guterres.
Social
Social aspects look at the company’s relationships with internal and external stakeholders.
Does it hold suppliers to its own ESG standards? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do workplace conditions reflect a high regard for employees’ health and safety? Or does the company take unethical advantage of its customers?
Governance
ESG governance standards ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders.
ESG investors may require assurances that companies avoid conflicts of interest in their choice of board members and senior executives, don’t use political contributions to obtain preferential treatment, or engage in illegal conduct.
This will be a part of every investment discussion going forward and it is important for people to be aware of what it means. Sometimes the terminology can be confusing but the principals behind it are simple and make sense for the long-term health of the planet. If we can promote sustainable companies they will thrive over the long term and thus improve all our lives while still making a return.
