Responsible Investing Why it’s Good for You, Others, and the Planet

Most of us like to do our bit for the planet, whether it’s being vigilant with recycling, using less plastic or cycling to work, but is it enough?

COP26 generated a new sense of urgency around the climate crisis. The message was stark and hard to miss. We need to make significant changes now or the consequences around the globe will be catastrophic.

We all want to do something to help and, whilst we can’t influence what happened in Glasgow, we can offer you an insight into the world of responsible investing. The impact of that can really make a difference.

Why Invest Responsibly?

‘Responsible Investing,’ as the name suggests, is choosing to invest your money in companies that meet or exceed a variety of standards in terms of the direct or indirect impact they have on the planet, how they treat the various communities they interact with and the robustness of internal controls and processes. The foundation for this type of conscious investment can be just about anything you feel is important. Whether that’s choosing a company that is socially responsible and looks after its employees or avoiding any company which deals in arms or tobacco and falls short of your ethical values.

Investing mindfully in this way is not a new concept, but the climate change debate has helped to elevate its profile as we hear more about green investing, sustainable investing and ethical investing. It sounds confusing, but these are all types of responsible investing, each supported by slightly different criteria, and with some overlap:

• Sustainable: Based on better ways of doing business to protect future generations, including environmental, social and governance factors.
• Ethical: Based on a company’s operational activities and moral perspectives
• Green: Based on mitigating negative environmental outcomes
• Impact: Based on a firm’s intention towards a positive social or environmental impact

The bottom line is, if you’re looking to make an investment based not just on financial return, but on the activities of the organisation itself, then there’s a good chance you’re judging it on one of these categories, making it a responsible investment.

Where do I start?

Firstly, consider whether you’re just going to invest responsibly ‘when possible’ or if it’s a non-negotiable deal-breaker. Are you going to make an investment only if a company meets a stringent set of criteria or is there an element of flexibility in your decision making?

Next, and this is the big one, you need to work out what is important to you in terms of responsible investing. Are you searching for companies with a minimal carbon footprint and a strong ethical framework when it comes to their staff, or are you looking for an organisation that only partners with other environmentally friendly businesses? ‘Responsible’ means different things to different people so it’s important that you take time to understand where your own views lie.

So, how do I know if a company meets my investment criteria?

Once you’ve done your personal due diligence, it’s time to think about where you want to invest. As interest in this area grows, it is thankfully becoming much easier to work out the ideal home for your investment. You can find information about an organisation through their public records, which often include a sustainability report, via online reviews from employees, or on company websites. Many organisations are proud of the work they’re doing to be cleaner, greener and more transparent and they’re keen to shout about it but looking also at information produced by independent third parties will help you see through any potential attempts at ‘greenwashing’.

The FTSE4Good Index Series is a great source of information too. Launched in 2001, the tool helps investors to identify and invest in companies that meet globally recognised corporate responsibility standards. The selection criteria are ever-evolving, in order to incorporate changing standards and codes of conduct around the world.

Inclusion in the index stipulates that companies must meet criteria requirements in five key areas:

• Working towards environmental sustainability
• Up-holding and supporting universal human rights
• Ensuring good supply chain labour standards
• Countering bribery
• Mitigating and adapting to climate change

Of course, other ratings are available, and this is a rapidly developing area. Environmental, Social and Governance Factor ratings (ESGs) are useful when it comes to making investment decisions. These factors have become a key part of investing, and although reporting is not currently mandatory for all companies, many companies are choosing to disclose the information publicly. Work is also underway to create formal standards and definitions based around ESG factors, and the UK Government is introducing new rules making it mandatory for larger companies to disclose climate-related risks from 2022.

The information that’s available means you can search for potential opportunities based on either positive or negative impact. This might include for example ruling out companies who test on animals or use fossil fuels and incorporating those with a minimal carbon footprint and clear social responsibilities. However, it is important to bear in mind that whilst some organisations may meet certain criteria, such as being socially responsible, they may not meet others, such as being sustainable or impact aware, so the search is not always clear cut.

Of course, you might alternatively choose to outsource the selection of specific securities to an investment manager that can deliver a portfolio that meets your overall responsible investment criteria and many asset managers now offer a range of responsible investment funds.

Will I lose out financially?

In the short term, there may be differences in performance between funds that have sustainable mandates and those that do not. This is generally due to the exclusion of some sectors such as Energy or Tobacco and can have either a positive or negative effect at any given point in time. However, over the long term there is the potential for responsible investing to prove to be a more stable investment as a company that is already demonstrating such characteristics will have the foundations and policies in place to reduce any opportunity for controversy, fines, punitive regulation and negative media coverage.

And the best bit is, you might already be a responsible investor without realising. Many people don’t consider themselves as an ‘investor,’ but just having a pension means that you are. In fact, that can be a great place to start, it’s easy to find out more about your pension plan and the organisation that manages it and it’s also easy to switch to an alternative, if you decide they don’t meet your own responsible criteria.

Listening to the press reports from COP26 can feel slightly overwhelming but becoming a more responsible investor can make a difference. Your money really can influence what’s happening in the wider world, so it’s important to ensure that the impact it has is the right one for you, others and our planet.

Wise Investment provides a range of managed portfolios including portfolios that are dedicated to responsible investing. Contact us today if you would like to talk through responsible investing and how it could work for you.

 

Please note, these views represent the opinions of the Wise Investment and do not constitute investment advice. This document is not intended as a recommendation to invest in any particular asset class, security or strategy. The information provided is for illustrative purposes only and should not be relied upon as a recommendation to buy or sell securities. Wise Investment is authorised and regulated by the Financial Conduct Authority, number 230553.