There is a growing cynicism about political leadership in the West, accountability and governance. Many feel their votes do not count for much, especially where all decisions seem to be binary: for war, against war, yes against no and in versus out. As a result institutions and pension funds are now taking a much broader interest in how companies are run using Environmental, Social and (increasingly) Governance criteria as key tools of measurement when considering socially responsible investing.

As a result, media headlines have focussed on a distinctly polarised demographic of the nation, with Leavers and Remainers placed in stark opposition to one another. This creates a general mood of having little room for conversation or compromise in terms of political stance.

Indeed, votes for elected representatives only come around once every 5 years. In business however, shareholders get to vote every year at an annual general meeting. Again, reports of shareholder ‘activism’ are rife; Sir Martin Sorrell has recently been in the headlines as have Barclays, both due to investor intervention.

And whereas it used to be the corporate raider who was the lone voice on the Board (as in the case of Barclays), now institutions and pension funds are taking a much broader interest in how companies are run using Environmental, Social and (increasingly) Governance criteria to measure firms in which they have a shareholding.

Similarly, as individuals, shouldn’t we too be interested in the ‘ESGness’ of our own investments?

Socially responsible investment (SRI) should mean investing in stock market listed companies following strict criteria on environmental, social and governance issues, as well as investing directly in sustainable businesses. But where does one draw the line?

SRI funds invest into a range of assets, but predominately shares in companies (equities) or bonds issued by those same companies which have a combination of a strong financial position and a demonstrated ethos of delivering sound social and environmental performance.

A good SRI manager will look for companies that not only outperform others financially but also outperform within their sectors on sustainability. As influential multinational companies, they have a global impact on environmental and social change.

What about governments?
You can invest in sovereign bonds if the issuing government fulfils the highest standards of democratic government, and importantly, has signed the world’s most important environmental, social and human rights treaties and conventions.

Active engagement
A good SRI manager will engage with companies and after investing will use their voting rights, sometimes with other engaged investors, to further influence their behaviour.

So what are the criteria for investing? One asset management company, Triodos, has the following as an example:

“Any company that derives over 50% of its revenues from sustainable activities that contribute to the well-being of people and the planet qualifies for investment by one of our SRI funds.”

BMO, another fund manager who now runs the Stewardship range of funds (and was at the forefront at what was then called ‘ethical’ investing), also use their influence as shareholders to encourage more socially responsible and environmentally sustainable behaviours by companies. The investment philosophy is based on three pillars:

1. Invest in companies that demonstrate responsible business practices, and support those whose activities make a positive contribution to society and the environment.

2. Avoid investments in companies with activities that harm society or the environment.

3. Use influence as an investor to encourage companies in their efforts to improve management of ethical and ESG issues through engagement and voting.

Globally we are confronting a range of critical challenges. Growing economies and populations are putting stress on our resources. Solutions to the issues of water, food and energy shortages brought about by ageing populations do not have to come only from governments and philanthropists; these problems can be tackled through harnessing the unrivalled dynamism and creativity of businesses and markets. There are a wide range of companies addressing these problems head on which will provide the potential for excellent long-term growth. Investors are increasingly wanting some or all of their investment portfolios to contain elements that are not only financially fruitful, but service sustainability and ethical goals. With this, there is a bourgeoning amount of choice out there.

To discuss your own investment portfolio please get in touch

This entry was posted on Monday, 23rd April 2018 at 9:40 am and is filed under Financial Planning. You can follow any responses to this entry through the RSS 2.0 feed.

Tags: esg, investment, social investment