Sustainable and responsible investments offer a wide range of strategies – combining different issues in different ways. How issues are dealt with, and applied to an investment strategy, is referred to the fund’s ‘approach’.
Some approaches alter where a fund invests, others do not. All SRI strategies are implemented alongside standard financial management methods and investment aims. As such they form part of a fund managers investment strategy – but do not represent their entire strategy.
The main approaches taken by SRI, green and ethical funds fall into three groups. These are:
Supporting companies that are doing positive, beneficial or desirable things – by buying into them
- This is a key feature of themed or positively screened investments. Such investments tend to focus on certain business areas or activities that they wish to support or benefit from. Decisions of this kind are normally made with the help of specialist researchers who help fund managers to identify whether or not a company fits the criteria they are looking for. Such strategies are likely to direct investment towards particular types of companies.
Avoiding companies that do things the fund has committed to exclude – by not buying into them
- This is a key feature of negatively screened ethical investment. Negatively screened ethical funds avoid investment in specified business activities or industries. Funds of this type typically have a list of exclusions and assess companies against a range of social, ethical and/or environmental criteria in order to decide whether or not a company is potentially acceptable as an investment. This reduces the number of companies a fund can invest in – although the extent to which this is the case varies significantly.
‘Engaging’ for positive change. Using investment ownership to encourage progress on environmental, social, or governance issues where there is a business case for change
- Engagement – also known as ‘Responsible Engagement’ – can be a standalone strategy (‘Engagement Only’) or applied alongside other approaches such as screening or thematic investment. Engagement is quite different from other SRI approaches as it is about what an investment house does with the assets they hold rather than relating to buy/sell strategies. Engagement activity primarily involves using dialogue, voting and other forms of responsible shareholder activism – such as shareholder resolutions. In most cases these are ‘regular’ funds and investors may not be aware that fund managers are seeking to influence companies with the aim of enhancing shareholder value.
- This area is also increasingly referred to as ‘investors stewardship’ or simply ‘stewardship’
- There are many retail investment funds to which engagement and stewardship strategies apply
- A significant number of screened and themed SRI funds include engagement or stewardship strategies as part of their ongoing activity.
- There are one or two funds which carry out engagement and exclude a tiny number of ‘unacceptable’ companies – this is an emerging SRI strategy.
Delivering positive impacts
There is increasing interest in ‘impact investment’ amongst the SRI managers.
The two key aspects of investing via a collective investment fund (such as an OEIC, SICAV or Pension fund) with regard to delivering improved social and/or environmental outcomes are:
- ‘Intentionality’ – a stated aim to deliver positive outcomes through investment activity
- ‘Measurement’ – work being carried out to assess or measure the benefits of investing in a particular way. This area is new and although groups such as the GIIN (IRIS tool) are helping investors to achieve this, it is widely regarded as ‘work in progress’.
Funds that ‘Aim to deliver positive impacts’ and ‘Measure positive impacts’ can be identified via the filter options on Fund EcoMarket.
Fund EcoMarket does not list ‘social impact’ investments which are typically not structured as collective investment funds.
Funds can combine any number of these methods – sometimes employing different approaches to different challenges or opportunities to create an overall strategy.
Depending on which of these methods an investment manager uses, some investments may be quite similar to their non-SRI sector competitors, whilst others are very different.
See filter options on www.FundEcoMarket.co.uk to identify individual fund strategies.