Socially Responsible Investing

Socially Responsible Investing (SRI) has certainly gained a lot of attention over the last 18 months.

Concerns over climate change, the high profile of Greta Thunberg, and even Covid 19 have focussed the thoughts of investment managers, advisers and investors on whether their investments are making a positive impact on the world.

Fund management companies have bombarded the market with new funds trumpeting their SRI credentials.

However, the poor investor is left wading through a thesaurus of terms and names for these funds as marketing departments differentiate their product from others. How can an investor match up a particular portfolio with their specific views and still achieve decent returns?

SRI is the catch-all name for these investments.

ESG (Environmental Social Governance) is another label that is commonly used as an alternative, but this mostly looks at how a business behaves in those categories, rather than how beneficial are the goods or services they sell. Some claim ESG funds have beaten conventional funds in the current crisis.

So here is a short explanation of some of the common terms used by investment companies:

Ethical: Avoiding controversial industries such as tobacco, arms, gambling and pornography. More recently it has come to include fossil fuels.

Sustainable investment: Businesses producing in a sustainable manner are a big part of the economy now and hold the key to tomorrow. Likely to be more profitable long term than old-fashioned industries. Includes environmental technologies, renewables but also health, education, cyber security and many others.

Engagement: Challenging companies you are invested in to improve how they are run, taking a more proactive approach for the benefit of a broad range of stakeholders, not just shareholders.

Stewardship: Having formal policies to hold companies to account by actively voting and challenging them to improve the way they operate.

Impact investment: An extension of sustainability themes where investors want to invest in companies with meaningful positive impacts.

Unfortunately these definitions are not static as marketing departments use terms differently.

What is really important is that ESG aspects are analysed to help make better investment decisions that can generate competitive returns while allocating capital away from the most harmful businesses towards those providing us with what we need to live in a more sustainable world.

Fund managers should be clear about what they will and won’t invest in and be transparent and open to challenge on any of their investments held in a fund claiming to be sustainable.

Transparency on what engagement they participate in, and how challenging their stance, is important too.