Do you know the new rules of responsible investing?

Published 29th October 2020 by Charlotte Moore

The first in a series of articles on responsible investment.

One of the major benefits of working as a financial journalist is an industry-wide perspective – which has lead me to view responsible investing as a continuum.

Investing to improve society covers a panoply of different strategies and activities. For one active investor it might mean excluding certain sin stocks such a weapons manufacturers and tobacco.

Another active investor might prefer to select companies based on their environmental, social and governance (ESG) characteristics and select only those which score well. There are those who will invest in companies which could improve, for example, their environmental policies and will encourage the board of directors to change strategy.

For providers of passively invested products, the challenge is different. Their ability to select stocks is constrained when they have to track a particular index. But they can identify those companies which could improve their ESG scores and use their heft to encourage change through the use of shareholder resolutions.

Exclusion, selection or engagement?

A responsible investor can be involved in exclusion, selection or engagement – or a combination of those activities. For an asset manager this might vary across products or it could apply to the whole product range. Institutional investors are increasingly embedding these principles into their investment philosophy.

With responsible investing covering such a broad range of different activities, individual investors, pension scheme members, wealth managers, trustees and investment consultants are becoming confused. And confusion is dangerous because it often breeds distrust.

The irony of this situation is a growing proportion of investors – both individual and institutional – want their investments to improve society. So if an asset manager or a pension scheme can communicate their responsible investment strategy clearly, they are likely to build trust and improve the value of their brand.

Spell it out

A pension scheme should, for example, explain why it has chosen to exclude tobacco from its investment portfolio but not fossil fuels because it believes by working with other investors it can help oil and gas majors to adopt net zero carbon targets.

And an active manager could explain they have selected those companies with the highest environmental scores for a particular fund because that approach provides a good hedge against climate change risk.

Passive investors can demonstrate they understand that size comes with responsibility – they actively screen their portfolios for those companies where engagement would be effective and actively campaign to change behaviour.

We find a successful communication strategy can help to articulate a responsible investment philosophy clearly by providing details of steps being taken.

At a time when the industry needs to be talking more, why not talk to us? Email