Responsible investing can be confusing as there are so many names and terminologies: Environmental, Social and Governance (ESG) Investing; Sustainable Investing, Impact Investing and Socially Responsible Investing to name a few.
However, one thing we can agree on is that it is becoming a much larger part of how people invest. As awareness around the challenges affecting our planet and population increase, more people are incorporating this into their investment choices.
Responsible Investing isn't black and white, there is a spectrum of investment approaches. From Conventional Investing, where only returns are considered; through Socially Responsible Investing, where ESG factors are incorporated but returns are also considered; to Social Impact Investing, where the impact of an investment is measured, rather than just the return; through to Philanthropy, where the objective is to give back to society rather than generate returns.
Investors can choose where they want to be positioned on this spectrum, and the choices available are getting much broader.
There are a large number of reasons why investors are incorporating responsible investing into their decision-making process, including:
- Managing risk: Environmental risks are considered to be top of the risk agenda by many, including the World Economic Forum.
- Fiduciary duty: There is a responsibility by those who manage other people's money (e.g. fund managers) to act in their beneficiaries' interests. Responsible investing factors are now considered to be financially material and therefore should be considered in the investment process.
- Client demand: As noted above investors are becoming more interested in the environmental and social impacts of the companies that they invest in, and also that these factors influence company value, returns and reputation.
- Financial materiality of integrating ESG factors: by incorporating these factors it can lead to reduced costs, risk of fines and state intervention and increased efficiencies and ability to benefit from global trends.
However, there are also some challenges, including:
- The perception that incorporating a responsible investing approach can have a negative impact on performance.
- The level of resources required to complete due diligence and research on responsible investment options and the availability of data to support this, along with the consistency of the information.
There are a number of initiatives working to help facilitate responsible investing and I think this area of investing is only going to get bigger.
- Charlie Rigg, FMB Chartered Financial Planner
Please note that the value of your investment can go down as well as up and you may not get back the full amount you invested.