About sustainable, responsible, ESG and ethical investments

Historically, most investors paid little or no attention to sustainability, environmental, social and governance issues – or the wider responsibilities associated with asset ownership.

This has changed significantly over the last decade.  There is now a wide range of fund and portfolio options that focus on this area and the integration of ESG risks and responsible ownership activities into ‘regular’ funds is now commonplace. 

Funds and portfolios that focus on this area may be referred to as sustainable, ESG (environmental, social and governance), ethical, impact or various other terms.  

As the names imply, their strategies are do however vary.   There is often crossover between these and sometimes the terms are used interchangeably, although less so now that new legislation (SDR) is in place. 

The main difference between funds that specialise in, or focus on, sustainability, ethical, impact or responsible investment issues is that their strategies look beyond immediate, short term profit and consider medium and longer term, real world issues.

These are investments – so they aim to generate competitive financial returns –  however the way they do this is (to varying degrees) different from other strategies.

Funds and portfolios in this area vary both in terms of the issues they consider and how they deal with the risks and opportunities they face.   – which is why there are around 300 filter options on our Fund EcoMarket database.

The main differences between strategies is a) the ‘issues’ they consider and b) the ‘approach’ the manager takes to these issues.  In other words:’what’ the strategy considers (in addition to regular financial considerations)  and ‘how’ the strategy responds to those issues.  Both should be explained in fund and portfolio  literature. 

Issues

• Environment e.g. climate change, pollution, biodiversity and nature, environmental management, waste management, the use of natural resources – including water, forestry, mining
• Social e.g. human rights, labour standards, child labour, equal opportunities, food supply, health and safety, diversity and inclusion
• Governance e.g. issues relating to company management, such as; board structure, diversity, executive remuneration, bonuses, avoidance of bribery and corruption
• Ethical e.g. values based and ‘personal’ ethical concerns, such as; tobacco, armaments, guns, pornography, alcohol, irresponsible marketing or advertising, animal welfare, animal testing (for cosmetics, medical or pharmaceutical purposes)

Approaches

The three main groups of ‘approaches’ fund managers can offer are:

• Positive investment selection:  This is where fund managers buy shares or other investment instruments offered by organisations (normally listed companies, but also bonds, sovereigns etc) that meet certain criteria or are widely viewed as contributing usefully towards a fund’s objectives – which in this area normally related to helping build a more sustainable future. The proportion of revenue that relates to desirable activities varies.
• Avoidance or exclusions:  This is where fund managers exclude or do not buy certain investments that fail to meet certain criteria or requirements.  This typically relates to what the company does (or makes) and, or how it operates.  Funds that say they avoid certain areas should be expected to do so – however strategies vary and different funds have different criteria (eg a fund with tobacco exclusion policy may invest in supermarkets if its tobacco related income is below eg 10% of revenue.)
• Stewardship / responsible ownership:   is  about fund managers working with the assets they hold to encourage sustainability related improvements for mutual benefit.  This can relate to a relatively minor aspect of their business or it may be more significant.  In equity markets this typically involves fund managers discussing issues of concern with company management, and if necessary voting their shares in a way that might encourage the changes they wish to see with shareholders supporting, opposing or abstaining from proposals put forward at annual general meetings (AGMs).  In bond markets stewardship typically takes the form of investors, or potential investors, discussing issues with company (or other asset) management, making requests – and either supplying or withholding capital dependent on the responses they receive. It is now considered good practice for stewardship strategies to include ‘escalation strategies’ – describing how a fund manager may respond if progress is slow (which is not uncommon).

 

.