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 very rapidly over recent years.  There is now a wide range of fund options that are popular –  if not always sufficiently well understood.

Funds that do so are known as sustainable, ESG (environmental, social and governance), ethical, impact or SRI (sustainable/socially responsible investments) funds.

As the names imply, their strategies are different – although there is much crossover between them which means they are still sometimes used interchangeably.

Funds 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 ways in which these funds vary relate to the issues they consider, or focus on, and the way in which they deal with the risks and opportunities those issues present – which may be reflected in the fund’s aims and objectives.

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).

 

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