ESG Investments

What is responsible investing?

Responsible investing is an investment approach that focuses on avoiding companies that are involved in controversial activities, such as tobacco, weapons, or gambling. It also involves considering companies' ESG practices in the investment decision-making process, but the primary goal is to avoid investing in companies that have a negative impact on society or the environment.

What is sustainable investing?

Sustainable investing is an investment approach that seeks to invest in companies that have a positive impact on society and the environment.

It involves considering more than just traditional financial analysis though. It is about also paying attention to how nonfinancial factors such as Environmental, Social, and Governance (ESG) considerations may impact an investment’s ability to generate long-term returns. This Style of investing goes beyond just avoiding negative companies and seeks to invest in companies that are actively working towards sustainability goals, such as reducing carbon emissions, promoting renewable energy, or improving social equity. The idea is that those actively preparing themselves for future risks and opportunities by recognising their social and environmental impact will have better long-term prospects than those that do not. Their ability to generate sustainable financial returns should therefore be superior to those that take a shorter-term view.

Why has it become so important?

Social and environmental trends post increasingly significant risks to investments, to a point now where they can no longer be ignored. Moreover, it is increasingly being considered a normal part of fiduciary duty to clients to consider ESG factors. People all over the world are becoming increasingly conscious of acting in the best interests of the environment and society at large. As a result, investors are increasingly looking to invest in a way that reflects these personal values. It is no longer about profits above all else. How a company makes its money is just as important as how much it makes. As a result, investors are demanding more from their investments; more transparent reporting, greater commitment to tackling social and environmental issues, and more concrete evidence of them having done so. 

Is there a trade-off between performance and sustainable investing?

Sustainable investing is not about sacrificing financial returns. The goal is still to make money but in a more responsible, long-term way. While there are other influences (some of which may be outside a company’s control) that will affect how well a company does over time, several academic studies have shown a connection between sustainability factors and improved performance. One study (Friede & Busch 2015) found that companies focused on ESG enjoyed, on average, enhanced financial performance, while analysis by Arabesque Asset Managers and Oxford University show that good sustainability practices positively impact share prices. Morgan Stanley has also done research that shows sustainable funds can help protect investors against downside risk.

Are sustainable funds expensive?

Historically, sustainable funds have been more expensive than their traditional counterparts because they used to be something of a niche area that required specialist skills. But now sustainable options have become more widespread and the skillset more prevalent. Sustainable funds have become more competitively priced compared to traditional funds, and in many cases cost the same as a traditional fund.

Must I avoid ‘sin’ stocks?

This is entirely up to you. With such a wide range of sustainable funds on offer, there is no reason why you should have to invest in a fund that does not completely align with your values and beliefs. If you want to exclude such stocks, you should focus on funds that screen for these types of companies and actively avoid investing in them so that you have nothing to do with them.

Should I avoid fossil fuels given the scale of the global climate challenge?

Again, this is entirely up to you. If investing in such companies is not in line with your beliefs then you can invest in funds that exclude investment in fossil fuels. If you do not want to exclude them entirely but are still worried about the potential investment risks, you can always look at funds with an integrated approach to investing. Here, individual companies or activities are not excluded, but they are held at a weight that reflects their risk. Managers are usually committed to actively engaging with them to improve the sustainability of their business practices and corporate behaviour to mitigate potential risks arising from the negative impact they are having on the environment or society. 

Questions you need to ask yourself as to what type of ESG investor are you?