Responsible investing: an introduction

This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.

Increasingly, investors want to know the impact that their investments are having on the world - not just the returns they generate. “Responsible investing” (sometimes also called ethical and ESG investing - environmental, social and governance) is gradually normalising, especially as western governments push their economies towards renewable energy, electric vehicles and other environmentally-friendly schemes and policies.

In this guide, our financial advice team here at Castlegate in Grantham, Lincolnshire offers an overview of how responsible investing works, where things could go in the future and how our team can help you to integrate this approach more into your own portfolio, with mature offerings now available through fund managers including Brooks Macdonald (via their Responsible Investment Service) and Liontrust. We hope you find this content helpful. If you would like to discuss your own financial plan please get in touch to arrange a no-obligation financial consultation, at our expense:

01476 855 585
info@casfin.co.uk

Why responsible investing?

There are, of course, personal reasons why someone might want to invest responsibly. Maybe you feel passionately about reducing your carbon footprint, and wish to focus your portfolio on companies which are either “carbon positive” or “neutral”. However, there are also forces in the wider marketplace driving moves towards ESG (or responsible) investing. These include:

• Regulation. Since the 1990s and particularly since the 2008 Financial Crisis, regulators have been increasing policy interventions into the financial sector so that it helps to address global challenges (such as climate change). Many countries now encourage or require companies and stock exchanges to disclose ESG risks and opportunities.
• Demand. Clients increasingly expect publicly-traded companies to play a role in tackling ESG issues, and be transparent about their own behaviour. This has been encouraged particularly by millennials starting to invest; about a third of whom exclusively focus their investments on those which take ESG factors into account.
• Materiality. There is growing recognition that investor returns are affected by ESG. For instance, in 2010 British Petroleum (BP) reached a $18.7bn settlement over a deadly oil spill in the Gulf of Mexico. Also, in 2015 Volkswagen rigged 11m diesel vehicles to pass emissions tests, resulting in fines and penalties of €27.4bn. Indeed, over 2,000 studies have shown that ESG factors have “overwhelmingly positive results” for investors, with only 10% showing a negative relationship.

Types of responsible investing

For each investor, investing “responsibly” will look different depending on your financial goals, values, financial situation (e.g. current portfolio composition), risk tolerance and investment horizon. This is partly why so many different names exist for “responsible investment” including ESG, ethical investing, green investing, socially responsible investing, impact investing and also sustainable investing. Here is a broad overview of how these types differ, and interrelate:

• Ethical investing. This investing approach typically involves screening out companies which are deemed unethical by the investor - or by international declarations and/or conventions (e.g. UN Convention on the Rights of the Child).
• Socially responsible investing (SRI). Social criteria are used here to evaluate different companies. These include occupational health, community welfare and discriminatory hiring and promotion practices - such as those based on race.
• Sustainable investing. This can be defined in different ways. For instance, an investor may understand sustainable investing as selecting funds (or assets) for his/her portfolio which can be described as “sustainable” in some way. For another investor, however, it may involve focusing on “industries of the future” and excluding those which, arguably, are harmful to long-term sustainability (e.g. energy industries based on fossil fuels).
• Green investing. This approach focuses investing in assets which can be defined as “green” - e.g. recycling, pollution control and low-carbon power generation.
• Impact investing. Here, the main goal is to pursue investment returns whilst seeking to achieve a specific environmental - or social - objective. For instance, this could involve helping people in a specific community recover from drug addiction.

How to invest responsibly

Broadly speaking, there are two main approaches available to investors when seeking to invest more responsibly. First, a new investor can factor ESG issues into the construction of a portfolio (ESG incorporation). Those currently with a portfolio, moreover, can incorporate these more into existing investment practices using at least one of three approaches:

• Integration. Gradually incorporate more ESG factors into the analysis of existing assets in the portfolio, using these to help manage risks and promote returns.
• Screening. Use filters to list potential new investments for the portfolio, excluding those which do not meet the investor’s ESG criteria.
• Thematic. Move the portfolio’s composition more towards the contribution of addressing a specific social or environmental cause.

Second, an investor can encourage companies which he/she is already invested in to improve their behaviour and practices with regards to ESG. This could be done through direct discussion (e.g. individually or in collaboration with other investors) or through proxy voting. Here, you need to be a shareholder with a large enough stake to propose resolutions and vote on them.

Conclusion & invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585
info@casfin.co.uk