Originally seen as a niche investment sector, responsible investment is now not just in the ascendancy – it has become increasingly mainstream. It has been a long journey since the first ethical investment vehicles were launched in the 1980’s (EdenTree’s Amity UK Fund among them), but now around 80% of asset managers and asset owners now incorporate a degree of environmental, social and governance (ESG) factors into their decision making.
Responsible investing allows you to make a positive difference to the world by entrusting your money to an investment manager, or fund, that integrates ESG or responsible criteria into the traditional investment process. Through these processes, the investment vehicle chooses very carefully the companies that it invests in, based on their principles – what they believe in and what they do – as well as their prospects for growth and returns.
One of the often confusing factors around responsible investing is that there are many different ways to approach it, and many different terminologies which often overlap. For example, ethical investing has its roots in faith-based investing and typically sees investors avoid associating their money with practises they do not agree with. Sustainable investors seek to invest in companies that generate returns without future detriment to the environment and society. Responsible investing incorporates both of these aspects into its process.
One of the key issues to arise from this is the danger that investors end up confused or the victims of ‘greenwashing’ – a term used to describe when asset managers purport to be ‘green’ through marketing rather than fully integrating ESG and sustainability into their investment processes. Unfortunately, the loose appellation of ‘SRI’, ‘ESG’ and ‘ethical’ to funds has created a caveat emptor – ‘let the buyer beware’ – situation. As demand grows for ESG, it is crucial to assess which asset managers are offering credible solutions.
Despite this issue however, we believe responsible investing appeals to the very basic tenets of the investment wisdom. It is primarily about risk mitigation as well as adding value. Companies that take seriously their responsibilities to society and the environment, managing the associated risks, are more likely to be those that will deliver sustainable outperformance over the longer term. Research indicates companies that are built on strong ESG practises are lower risk because they are well managed, and their headroom for revenue and profit growth is significant due to their provision of sustainable solutions which are increasingly in demand.
As companies become increasingly global, their risk profile increases. A global supply chain and client base can present multiple risks around human rights, labour relations and business practices, which if mismanaged could lead to reputational damage, fines or a loss of licence to operate. All of this can detrimentally affect the performance of the company and the client’s return. A responsible investment process seeks to identify these additional risks and understand how the company is managing them. Additionally, companies that manage their impact on the environment are increasingly turning cost centres into profit generations, whether through reducing energy use and recycling waste, or preparing for changes in legislation and regulation. These savings and additional income all contribute to a company’s performance and ultimately to the shareholder’s bottom line.
Therefore responsible investing does not have to come at the sacrifice of performance either, because it is routed in the long-term, whether it be on the issue of climate change or any other social or environmental challenge that we face. As such, ESG considerations are actually perfectly positioned to be investment criteria if we consider the practise of investing is designed with a long-term horizon in mind. Responsible investing in companies that are built on sustainability gives you the ability to identify long-term trends with much more accuracy, which in turn allows you to more consistently achieve what we at EdenTree call ‘profits with principles.’
Overlaying ESG or responsible investment process has enormous benefit for investors and the market is certainly recognising this. Studies also show that the younger generation of investors, those who are just beginning, are far more conscious of social and environmental issues and much more likely to opt for a responsibly managed fund which fits their wider outlook.
Collectively, the result is a compelling investment thesis.
Please remember past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. You should always retain professional advice before making any investment decisions. For advice on investments speak to a member of the Blackadders Wealth Management Team today.
Jamie Daniels, investment manager