Socially Responsible Investing and Environmental, Social and Governance Investing explained…
Social and environmental change is accelerating at pace, with climate change one of the biggest issues facing humanity today. Recent climate protests around the globe have raised awareness and prompted many people to question their personal and corporations’ impact on the environment. This heightened awareness has transcended to investment preferences.
Ethical investing traversed into the mainstream as people increasingly choose to allocate their investable funds towards companies whose values and practices align with their personal beliefs, whether they be environmental, social, religious, or political. Some investors may choose to exclude specific industries or allocate to other sectors which meet their ethical preferences. This involves creating an investment policy with very specific rules aimed at avoiding companies or industries that don’t meet your criteria.
Terminology maze
We live in a world of acronyms and abbreviations; investment terminology is certainly not excluded from this phenomenon, with terms such as Environmental, Social and Governance (ESG) and Socially Responsible Investing (SRI), widely used, but what do they mean?
Social responsibility
Socially Responsible Investing, SRI, was originally developed to allow investors to avoid companies they disliked for ethical or values-based reasons. This original form of SRI is now called ‘exclusions’ or ‘negative- screen’ investing. Other SRI strategies have been developed, including positive screening or thematic investing, where only investments in companies aligned to the investors’ values are made.
Today, SRI very much focuses on social issues, such as labour rights and encompasses any investment strategy which considers both financial return and social/environmental good to bring about positive social change. For example, some SRIs avoid businesses perceived to have negative social effects such as alcohol, tobacco and fossil fuel.
Environmental guardian
Environmental, Social and Governance, ESG, refers to a subset of non-financial performance indicators, which measure the sustainable and ethical impact of an investment. ESG factors can be used to evaluate corporate behaviour and to determine the long-term financial performance prospects of a company.
Increasingly, socially conscious investors are using ESG factors to screen potential investments and many larger firms are beginning to track their ESG progress. Environmental criteria look at how a company performs as a guardian for the environment, their impact on climate change or carbon emissions, water use or conservation efforts.
Social criteria focus on a company’s ability to manage relationships with its employees, clients, suppliers and the local communities in which it operates.
Governance examines a company’s leadership, shareholder rights, audits and internal controls, anti-corruption policies, board diversity, executive pay and human rights efforts, for example.
The three pillars of sustainability
Another investment style that takes into account environmental issues, is sustainable investing. Sustainability focuses on meeting the needs of the present, without compromising the ability of future generations to meet their needs. Here, investment tends to be focused on companies seeking to combat climate change and environmental destruction, while promoting corporate responsibility. The concept is composed of three pillars: economic, environmental and social.
Impact insight
Another term to become familiar with is ‘impact investing’. This involves, not only the avoidance of businesses contributing to damaging activities. It actively supports companies bringing about positive change in and around their business and the wider world, whilst demonstrating high levels of accountability and governance. This involves reviewing companies’ operating practices and selecting companies that are trying to solve social and environmental challenges. With an impact approach, investment decisions are based on a company’s impact evidence, rather than personal beliefs.
Navigate with certainty
Heightened public awareness and appetite for how money and investments can impact climate change and other societal and environmental issues, means that there is a growing movement towards greater mindfulness in ‘good’ or responsible investing.
Research is essential because although a company’s mission statement may reflect the values and beliefs of an investor; their practices may differ. Selecting investments based on ethics offers no guarantee of performance.
We’re here to help you navigate the investment options available; and the terminology!
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Brian Downton, DipFPC, CertCII(MP and ER) is Practice Partner and Financial Planning Consultant at Downton and Ali Associates 0203 0210075.