How do I invest responsibly?
This is a question we are hearing time and time again. With more investors wishing to avoid investing in areas that are linked to harmful activities, responsible investing is gaining momentum. But there is a lot of terminology around investing responsibly and it can all be a bit daunting and confusing.
Terms used include Ethical, Socially Responsible, Sustainable, and ESG investing (Environmental Social and Governance).
But what does it all mean?
And is one approach better than another?
Whilst we don’t think there’s any right or wrong, we’ll try to explain the different approaches available to you. For most investors, the most common confusion is between ethical and sustainable investing. So, let’s start there.
How do I invest responsibly? Ethical v sustainable investing
In this section of this guide to how you invest responsibly, we compare ethical versus sustainable investing.
Ethical investing
These types of investments are primarily driven by negative screening. For a fund manager, this process involves finding companies that score poorly on environmental, social and governance factors relative to their peers. This would include companies working in sectors that are harmful to society or the environment.
These companies would then be avoided in investment portfolio construction. For example, the investment portfolio could exclude companies involved in animal testing, gambling, armaments, tobacco and those that cause harm to the environment or have a poor human rights record.
For those seeking ethical investments, the importance of investing ethically is tied to their values and hopes for a better world. As more people take this approach, we could well see growth in this area of investing.
Related reading
Sustainable investing
Unlike ethical investing, sustainable investing is driven by positive screening. Instead of finding companies that score poorly as in certain areas, the fund manager would actively seek out companies that score highly. These companies could then be selected for investment portfolio construction.
For example, the fund manager, when constructing a portfolio of investments, would only consider companies that had products and services that helped create a cleaner, healthier, more inclusive society. They would encourage good corporate behaviour and their products and services would help solve the world’s social and environmental challenges. Sustainable investing is all about active engagement to encourage continual improvement.
What is ESG investing?
Let’s first break down what ESG stands for:
E, stands for Environmental, which looks at the business’s carbon footprint, its contribution to other forms of pollution, and its sustainability, for example, how renewable are the resources it uses?
S, stands for Social and includes factors like the diversity of the business workforce, inclusivity, and its responsibilities towards customers. It also looks at the company’s contribution to social well-being.
The G, stands for Governance and is related to how the organisation is structured and run, and how fairly employees are treated in comparison with management and senior executives.
Investing in the future
ESG investing is responsible investing and considers all these factors with the primary aim of delivering a competitive return for the investor. Whilst ESG goals may appear to conflict with growth aspirations, there’s a compelling argument to suggest that companies that pollute and fall outside ESG don’t have a particularly bright future, so why would you invest in them?
The 2008 monetary crisis was a stark example of what happens when profits are prioritised over ethics. Today, worldwide focus on climate change means that green technologies are attracting more investment and government subsidies, potentially giving them a financial edge as well as an ethical one.
The importance of advice
Get advice from an independent financial adviser (IFA) before taking the plunge. Why? There are countless investment funds in the UK, all of which want to attract your money. Choosing between them could be a daunting challenge. Information you find online may be biased, inaccurate, or outdated and you never know what personal stake a journalist may have.
An IFA, by contrast, is paid to work for you and to act solely in your best interests. Secondly, an IFA will be experienced in finding funds and comparing them objectively. They would know what to look for and what qualities and/or risks to be aware of. Most importantly, they will look at wider factors such as how any new investment complements other investments you may have, and ensure that you are invested following your goals, aspirations, and values.
