What is responsible investment?
It’s when investment managers consider environmental, social and governance (ESG) factors in what they choose to invest in, as well as in how they look after those investments.
It can be about an individual fund with a specific ethical, environmental or social theme. Or, it can be about fund managers analysing and engaging with companies they invest in to make sure that they’re responsibly managing ESG issues.
There’s a lot of jargon – what’s the difference between ESG and ethical?
Yes, there’s certainly a lot of terms related to responsible investment. It’s an area that’s grown greatly in importance and choice, and unfortunately this has meant multiple terms appearing.
But really, there are three main approaches. Managers can use these individually, or in combination, depending on what they’re aiming to achieve.
1.ESG integration – looking at ESG factors to help manage risk
Investment managers look at how a company manages its ESG practices and behaviours to understand if these may expose it to risks or opportunities. For instance, they may look at how a company treats its employees, suppliers and the communities in which it operates, its impact on the environment, such as waste disposal and energy use, and executive pay.
These factors are important as they can indicate a company’s overall health and quality – and therefore its future performance. And of course this, in turn, can affect the returns it makes for investors.
Think of the damage to reputations and share prices suffered by some companies due to their unfair treatment of employees, or damage they’ve caused to the environment. On the flipside, companies which look after their employees, supply chains and the impacts they have on the environment, are more likely to be resilient over the longer term.
Investment managers analyse ESG alongside other financial factors. They can do this for all types of funds, not just for those labelled as ‘ethical’. This means that a company that could be considered as being unethical could still be included in an investment labelled ‘ESG’ if it has good ESG practices.
2.Funds that screen in/out certain companies or that follow a specific theme
These are funds aiming to achieve a financial return alongside a specific ethical, environmental or social goal. This is where ethical funds come in – they usually screen in or out certain investments. So typically, things like animal testing, weapons, tobacco and carbon intensive industries are out.
There’s also a wide choice of funds with specific themes. These include climate funds that have an environmental focus, for instance investing in renewable energy and low carbon technologies. Or funds aiming to make a positive impact in society perhaps through companies that provide social housing or affordable education.
3.Stewardship – investment managers using their role to encourage positive change
Investment managers can use their role to influence positive change in the companies they invest in and help improve sustainability.
One way is to use their voting rights to encourage good management of matters such as governance, tax practices and climate change.
Another is to talk regularly to the companies they invest in to understand what they’re doing to manage ESG issues, and to encourage better conduct in these areas.
The umbrella term of responsible investment does cover a lot of approaches and fund choices so we’ve created a two-page summary guide to help explain it. To find out more, download Responsible investment: the basics.
Can investing responsibly make a difference?
Investors deciding which companies to invest in, based on how they approach things like environmental and social issues, can drive the management of companies to think and adapt their strategies. And as I mention in the point about stewardship, investment managers can play an important role in encouraging better corporate behaviour.
In addition, there’s growing evidence to show that companies taking these types of factors into account have been more resilient to market shocks and downturns, and may outperform over the longer term. Though please remember that past performance isn’t a guide to future performance.
So I suppose the answer is ‘yes’ – responsible investing can make a difference; to your own investments, to the impact companies have, and to the wider world issues we’re all increasingly aware of.
How can I invest responsibly through my pension?
If you’d like to invest according to your values, including through your pension plan, you should have a range of options to choose from.
On standardlife.co.uk you can find out more about how ESG is integrated into the investment choices available through Standard Life pension plans – just select ‘how ESG is integrated into your investment choices’. Or to find out about the theme-specific funds, including ethical funds, you can choose from, select ‘a choice of screening and thematic approaches’.
Where can I find out more?
Your pension’s invested to help it grow. That means its value can go down as well as up and it may be worth less than you paid in. Investment returns aren’t guaranteed.
The information here is based on our understanding in July 2020 and should not be regarded as financial advice.