How responsible investment aims to make you money without compromising the future

We all want to make responsible choices as more of us are becoming aware of global challenges, such as environmental issues, human rights and climate change. We’re also starting to care more about how our behaviours affect the planet and society.

We’re swapping the products we buy to those that are more environmentally friendly, as well as taking more time to consider our own impact on recycling, waste and pollution. That mind-set is also changing the way we invest money.

In the past, ethical funds that excluded certain types of investments, such as tobacco and weapons, were the only choice if we wanted to match our investments to our values. These funds are still popular but they’re now joined by a range of other options that let us invest responsibly.

What is responsible investment?

Responsible investment is a combination of different approaches to managing money that includes environmental, social and governance (ESG) factors. Investment managers will:

  • decide what to invest in
  • look at ESG factors in companies, so they can combine managing risk better while aiming for long-term returns
  • offer funds with specific ethical, environmental or social goals
  • encourage better ESG behaviours by using their role as a steward of investments

When we talk about responsible investment, we’ll mainly use these two terms:

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ESG incorporation

Investment managers can include ESG in both how they invest and how they design their individual funds.

  • ESG integration
  • A process used to analyse a company’s approach to ESG to help spot opportunities and manage risks (can be applied across all funds). This doesn't include screening. So investments which could be seen as negative may still be included.

  • Screening
  • Funds that exclude/include investments based on ethics and values (includes ethical funds).

  • Thematic
  • Funds aiming to achieve a financial return alongside a specific environmental or social outcome (includes impact funds).

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    Stewardship

    There are two ways investment managers can better understand ESG risks and influence positive change.

  • Engagement
  • Talking to companies they invest in about their ESG activities and practices to encourage better policies and conduct in these areas.

  • Proxy voting
  • Using voting rights on behalf of investors to encourage good management of matters such as governance, tax practices and climate change.

    Standard Life Assurance Limited's approach to responsible investment is based on the United Nations-supported Principles of Responsible Investment (PRI) and the UK Stewardship Code.

    How ESG is integrated into your investment choices

    When it comes to your investments, we’re accountable. That’s why it’s integrated into our investment options. It’s also why we need to understand how our investment managers integrate ESG when building portfolios.

    How ESG factors are applied to Standard Life’s range of investment options

    The following table shows a summary of how ESG factors are applied to our easy investment options and our do-it-yourself investment options. You can find more details below the table.

     

    ESG Incorporation

    Stewardship  

      Integration Screening Thematic Engagement Proxy voting
    Easy investment options:
    Active Plus range
    (funds and lifestyle profiles which include the funds) *Note 1
     -  -
    Passive Plus range
    (funds and lifestyle profiles which include the funds) *Note 2
     -  -  -
    Passive Core
    (lifestyle profile) *Note 2
     -  -  -
    MyFolio Managed range
    (funds and lifestyle profiles which include the funds)
     -  -
    Managed Fund
    (funds and lifestyle profiles)
     -  -
    Do-it-yourself investment options:          
    Funds managed by Aberdeen Standard Investments
    *Note 3
    -
    Funds managed by other external fund managers
    *Note 4
    *Note 5
    *Note 5
    *Note 4
    *Note 4

    Graph Easy investment options

    The funds in the Active Plus and MyFolio Managed ranges, and the Managed Fund (as well as any lifestyle profiles that use this), are mainly actively managed by Aberdeen Standard Investments. This means that ESG is integrated at all stages, as active investment managers have the freedom and flexibility to fully integrate the outcomes of ESG analysis in their investment strategies. Although ESG is integrated at all stages of the investment management processes, screening and thematic approaches may not be applied. So investments which could be seen as negative may still be included.

    The funds in the Passive Plus range and the Passive Core lifestyle profile use some underlying investments that track a market index, so ESG isn’t integrated into the selection of individual stocks. But all the passive investment managers we use have established investment stewardship programmes.

    maintenance Do-it-yourself investment options

    We expect all of the investment managers we work with to show how they apply responsible investment to their funds.

    There may be occasions when this isn’t possible, for instance where a passive investment manager has to track a broad market index. Apart from exceptions like this, we would like all the investment managers we work with to:

    • engage effectively with companies and, when necessary, escalate this engagement to drive better long-term performance from the business as a whole
    • use the voting rights they have to encourage positive commitments or practices
    • deliver robust reporting on their ESG engagement activities, including details on the factors they discuss, and any actions or outcomes agreed during these meetings

    You can find out more about how Standard Life Assurance Limited incorporates ESG into the insured (pension and life) fund range (0.98 MB).

    A choice of screening or thematic approaches

    If you want to invest in a way that suits your financial goals and values by avoiding or limiting investment in ‘bad’ companies, or creating ‘good’ portfolios through screening or thematic approaches, Standard Life offers a range of funds for you.

    You can choose actively managed funds that screen for positive or negative criteria

    You can decide to invest in one of the ethical funds we offer. These use positive and negative screening criteria and are managed by Aberdeen Standard Investments.

    Their positive criteria look for companies which are involved in activities that benefit society and the environment. Their negative criteria looks to avoid investment in companies involved in certain industries and practices such as animal testing, climate change impacts and human rights issues.

    Find out more about Aberdeen Standard Investments' ethical investment approach for these funds.

    You can see the choices that are available in the table below and you can download their factsheets to learn more about each.

    You can also invest in passively managed funds that take a different approach

    These funds have broad coverage of the market, but exclude investments that don’t meet specific socially responsible or religious principles. They’re managed by Vanguard and HSBC Global Asset Management.

    You can see what’s available in the table and read the factsheets to find out more.

    How investment managers used ESG integration to manage risk

    If you’re looking for something that’s relevant in all investments then you’ll be looking for ESG integration. This is when investment managers use ESG integration at the same time as all their other financial analysis.

    Investment managers look at whether a company’s ESG activities and practices are offering investment opportunities or exposing it to risks. They might look at the impact a company has on local communities and climate change, or how they manage their supply chain or natural resources.

    On top of their usual research, investment managers will look at these areas:

    Environment

    An investment manager can look closely at a company’s impact on land, sea, air, wildlife, plant life and the climate. They might consider things like how much energy a company uses, waste disposal, land development and carbon footprint.

    Social

    An investment manager can review a company’s relationship with its employees, suppliers and the community where it operates. They might consider things like labour practices, human rights, employee wellbeing, health schemes for staff and supplier relationships.

    Governance

    An investment manager can look at the issues that might affect a company’s management and processes. They might consider things like who’s running the company, how the company and its finances are managed, and how it approaches salaries and strategy.

    Using stewardship to influence positive change

    In its broad sense, stewardship means overseeing or taking care of something. Investment stewardship is no different; it’s about engaging with companies to understand all the risks and opportunities they present, to promote their long-term success. Doing this benefits everyone; from the individual company, to its investors, to the economy as a whole.

    Active engagement

    By regularly talking to companies, investment managers can better understand their strategy, performance, risk, capital structure and corporate governance.

    It’s a way to spot both opportunities and risks, as well as:

    • influence positive corporate behaviour
    • encourage better sustainability, resource efficiency and involvement with society

    Proxy voting (casting votes on behalf of investors)

    Another way that investment managers can influence change is to use voting rights. That’s when they cast votes on behalf of investors on matters such as good governance, climate change, tax practices, labour standards, diversity, bribery and corruption.

    Approach to stewardship and engagement

    Standard Life Assurance Limited's approach is based on both the UK Stewardship Code 2020 and the European Union’s Shareholder Rights Directive II. It’s also in line with their current philosophy on responsible investment. Find out more here.

    Understand how screening and thematic approaches can reflect your values

    You can choose from a range of funds that aim to achieve a financial return alongside a specific ethical, environmental or social outcome. These types of funds are often described as using ‘screening’ or ‘thematic’ approaches.

    Screening

    Funds are screened and have filters applied to rule companies in or out of investments based on objectives, preferences, values or ethics. That could be removing investments that could be seen as negative or seeking those that are trying to make a positive impact.

    Thematic

    Funds which invest in companies that aim to address a social or environmental issue. For instance, affordable housing, renewable energy solutions or sustainable transport.

    This includes impact funds.

     

    If you’re looking for a fund to apply screening, focus on a theme, or use a mix of these approaches, you might:

    Be looking for funds that invest ethically

    These include funds that tend to avoid investing in companies connected to activities like animal testing, tobacco or weapons. Some funds also look for companies which aim to make a positive difference to the environment and society – and some use a combination of negative and positive criteria.

    Want to invest in funds that focus on social responsibility

    Socially responsible (SRI) funds help you invest in companies which balance business interests with the effect they have on the environment and community.

    Need or want funds that align to your faith or religious beliefs

    Faith-based funds, for example Shariah investing, align how a fund is invested to certain religious principles of laws.

    Be keen to invest in companies that intend to make a positive and measurable contribution to the environment or society

    Impact funds invest in companies that aim to achieve a measurable positive social or environmental impact in addition to a financial return.

    Next steps

    Hopefully you now have a clearer understanding about responsible investment. Knowing more about the options available to you should help you feel more informed about any investment choices you make in the future.

    Remember, if you want to know more about how ESG is applied to Standard Life's range of investment options, you can read that further up the page.

    If you're still not sure which investment options might be right for you or you need more information, you might want to think about speaking to a financial adviser. There's likely to be a cost for this.

    If you don't have an adviser, we can help:

    Remember: the value of all investments can go down as well as up, so there's always a possibility you could end up with less than was paid in.

    *1825 is a trading name for the Standard Life Aberdeen group's advice business.