What is sustainable investing?
You may have seen the terms ‘Sustainable Investment’ or ‘Socially Responsible investment’ (SRI). These are both ways of describing the criteria a professional Fund Manager will use in order to screen out or select the companies they invest in within the fund they manage.
In recent years, investors have increasingly been demanding that their money is invested in ways that reflect their values. There is a realisation that a large number of small investors can drive companies to take steps to improve the environment and make a positive impact on society. However, investors also want to see a positive return for their investment. Sustainable – or SRI investing – aims to achieve both of these things.
In the past the perception has been that funds that invest taking account of ‘values’ rather than just financial data would not perform as well as a fund that did not have the same restrictions. The view was that by avoiding sectors like oil the potential for growth would be reduced. However, there is a growing realisation that behaviour which wastes resources or is unethical is likely to lead to poor financial outcomes.
For example companies:
- Who have caused pollution (The Deepwater Horizon oil spill cost BP over $53 billion)
- Have been less than honest about their product (Volkswagen received large penalties and fines for falsely representing emission tests)
- Not treating their clients data with the care that they should have (Facebook saw the price of its shares fall following the revelations about data harvesting by Cambridge Analytica).
In this context, it seems reasonable that investing in companies with high standards in these areas could eliminate some of these potential risk factors. It therefore makes sense for investors worried about losing money on their investments.
Many investment professionals talk about Environmental, Social and Governance (ESG) factors when selecting companies to invest in. Examples of these factors are:
- Climate change
- Resource depletion
- Human rights
- Modern slavery
- Child labour
- Working conditions
- Employee relations
- Executive pay
- Board diversity and structure
- Political lobbying and donations
- Tax strategy
Fund Managers will often consider ESG factors to screen out or positively identify companies for investment. They do not necessarily choose companies which are completely perfect in every area (this might leave them with a very brief shortlist). However, the hope is that the additional oversight of the Fund Managers will encourage good behaviour and drive improvements in the business, leading to improved returns for investors, and improvements in the environment and in society.
Learn more about Sustainable Investing in our latest podcast:
If you are interested in investing in a way which better reflects your values and would like to consider this further, please get in touch with a member of our team 01903 534587.