19 Nov Investing and making a difference!
Sustainable and ethical investing has exploded in popularity over recent years. Global emergencies such as climate change have pushed investors to invest according to their values. In this article we explore the meaning of responsible investments, how investors can invest according to their values and we identify some of the key points to consider before investing.
Background of responsible investing
Responsible investing is an investment strategy, it is an umbrella term used to describe an investment process which takes Environmental, Social, Governance (ESG) or ethical considerations into account.
The practice of ethical investing began in the 1960s as investors started to exclude stocks or entire industries from their portfolios based on business activities such as tobacco production and animal testing practices. This is known as negative screening. An ethical investor would typically avoid investing in companies which they deemed to be socially irresponsible.
As investment strategies developed investors started to look more at positive screening. With this strategy rather than avoiding certain investment opportunities, the investor would actively look to invest in firms that meet certain standards or operate in specific industries, for instance, renewables.
Today, ethical considerations in investment management is rapidly growing and evolving, as many investors look to incorporate other factors such as sustainability into the investment process alongside traditional financial analysis.
What type of investor are you?
Responsible investing lets investors embed their values into their investments, when we discuss with our clients what is important to them; more and more of them are telling us that it does matter that their pension, for example, is invested in ethical and sustainable companies.
For most investors, it is not enough to exclude companies in their investment portfolios due to ethical concerns. They are looking to make a positive difference, they would like for the investment manager to invest in companies that work towards improving the environment, addressing Social inequality or Governance improvement. This is referred as ESG investing (Environmental, Social and Governance).
For investors looking for more engagement, they would like to invest with the intent to generate a more measurable positive social or environment impact; through an investment process called ‘Impact Investing’.
But you also do not have to be an environmentalist to consider ESG factors when you invest. It can be smart before investing to look at issues in the way a company is managed, or its effect in the environment and society that can cause reputational damage and impact profits. For example, Microsoft is one of the leading tech giants in the world, generating incredible returns for its shareholders, yet scores highly prioritising climate and social concerns, similarity Disney and Google are demonstrating positive ESG qualities.
So, how do you invest in responsible investments?
Until as recently as a few years ago, you had to go it virtually alone by doing research in individual companies and building an ethical and sustainable investment portfolio. But with the rise in consumer interest for responsible investments the Investment Management Companies now offer a number of options for ethical and socially responsible investments.
When it comes to responsible investing the investment universe is becoming broader and broader.
A number of the more established firms that are offering a range of index and passive funds with ESG considerations for investors which are cautious about fees.
Discretionary Fund Managers (DFMs) have also embraced the aspect of responsible investing and have a range of Socially Responsible Investment model portfolios strategies to suit different investor risk profiles.
However, for some investors that want to incorporate ESG considerations in their investments to better reflect their values, some solutions may not align with what others would consider essential. For example, if you’re investing through a fund, you’ll likely need to compromise in some areas. Even if you’re investing directly in businesses, the complex nature of business today may mean even a ‘good’ investment doesn’t perfectly match your views.
To address this concern some DFMs build bespoke portfolios rather than a ‘one size’ fits all solution that may not fully meet the investors ethical, ESG or impact requirements. For a bespoke offering portfolio construction is informed by the choices made by clients through an ethical questionnaire which covers the client’s specific ethical preferences or ESG policies.
The Investment Firm will then apply a combination of avoidance screening to avoid companies that are involved in activities that might be of concern and then also use positive selection to identify investments that are contributing to a sustainable society, for example companies involved in renewable energy technologies or social housing. This combined process better aligns the portfolio to the client’s values.
Turner Wealth & Consultancy works closely with Castle Investment Solutions, an Investment Support Company to bring our clients the very best investment solutions when it comes to Discretionary Fund Management. The DFMs in Castle’s panel like, Psigma Investment Management, Investec, Quilter Cheviot and L G T Vestra have embraced sustainable investment, and another DFM, Rathbones, has a team called Greenbank based in Bristol that specialises in responsible investments and it is a pioneer of this type of sustainable investments.
But, are there added investment risk by investing in responsible investments?
There is an argument that by investing in responsible investment there is an added risk as investors are restricting the universe of companies that they can invest in. However, the recent track record and studies have not found evidence to this view.
In fact there is also the opposite belief that companies providing positive solutions for a changing world, while also demonstrating strong social and environmental management and good corporate governance, are likely to be sound long-term investments. This could actually lead to responsible investment mandates outperforming the ‘standard’ portfolios.
It is also noted that during the Covid crisis ESG funds low exposure to oil and gas companies gave them an edge over non ethical and sustainable funds.
A recent study published in the Financial Times found close to six in ten sustainable funds delivered higher returns than equivalent conventional funds over the past decade. The research suggests that ESG criteria can drive investment performance in some areas. As a result, ESG investing could add value from a purely financial perspective.
However, due to the relative short track records of many strategies and huge variety in ESG and ethical investment approaches it is very difficult to come to a conclusion on under or over performance.
Understanding your investment position
While you may be considering ESG factors when investing, it’s still important to understand your financial position to select investments that are right for you and your goals.
The most important aspect is that investors align their values in terms of investments to the asset allocation that reflects their risk profile and investment objectives.
When we discuss investments with our clients we seek to understand each client’s unique financial aim, as well as their ethical, sustainability and impact requirements. With so many different pieces of information to pull together, investing can be complex whether you want to make ESG part of the process or not. We’re here to help you create a portfolio that considers the above and more to guide you towards your aspirations and goals. Please get in touch to discuss your investments.
Investment and Pension advice are regulated activities so you should speak with an Independent Financial Adviser. For more information or to arrange a no fee, no obligation initial consultation please contact us to: firstname.lastname@example.org
The value of investments can go down as well as up and so you may get back less than you originally invested.
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