The power to change the world
Posted by Andrew_Smith on Thursday 22nd of April 2021.
Ethical and sustainable investing are both popular and it’s useful to understand the difference between the two approaches.
Investing in a responsible way is nothing new. It dates as far back as the 1700s, when religious groups such as the Quakers refused to support companies involved with the slave trade or other activities that conflicted with their values. Ethical funds started to appear in the UK in the late 1960s and early 1970s, which allowed people to invest in a way that reflected their personal values.
Ethical investing usually involves using your principles to filter out certain types of securities. For example, some ethical investors avoid sin stocks, which are companies that are involved or primarily deal with traditionally unethical or immoral activities, such as gambling, alcohol or firearms.
Businesses involved with the tobacco, mining and oil industries are other typical ones to avoid.
A sustainable approach
Investing sustainably is different to ethical investing because it involves considering a wider range of issues – from how companies are managed to the impact they have on the environment and the roles they play in society. Investors are embracing this approach because there’s mounting evidence to suggest these issues affect how companies perform over the long term too.
According to calculations made by the sustainable finance team at Danish bank Nordea, moving your pension savings to sustainable investment funds can be 27 times more efficient than four popular ways of reducing your carbon footprint that involve making lifestyle changes – taking shorter showers, flying less, travelling by train instead of by car, and eating less meat.
It makes good financial sense
Investing in well-managed companies that have a positive impact on society and the environment makes good financial sense. For example, if a company suffers reputational damage because it’s been involved in an oil spill, discovered to be treating its workers poorly or accused of corruption, its share price will probably suffer.
Meanwhile, companies that use energy efficiently, invest in training their employees and pay their executives reasonable bonuses are likely to outperform their competitors and return more value to shareholders. Over the long term, they are also better prepared to meet future strategic challenges and take advantage of new business opportunities.
Incorporating an ESG framework
One of the difficulties with sustainable investing is that there’s no standard definition of what it means. However, environmental, social and governance (ESG) factors provide a useful set of standards to assess potential investments:
- Environmental criteria look at how a company performs as a guardian for the environment, their impact on climate change or carbon emissions, water use or conservation efforts.
- Social criteria focus on a company’s ability to manage relationships with its employees, clients, suppliers and the local communities in which it operates.
- Governance examines a company’s leadership, shareholder rights, audits and internal controls, anti-corruption policies, board diversity, executive pay and human rights efforts, for example.
We believe that by incorporating these measures into our processes for selecting the fund managers we use to build portfolios, we can manage risk more effectively and improve returns. In addition, we expect all our investment managers to integrate analysis of ESG risk and rewards into their own investment processes too.
We only engage with those that are signatories to the United Nations Principles of Responsible Investing, the gold standard in the wealth management industry when it comes to incorporating ESG issues into investment practice. The Covid-19 pandemic has had such a
substantial impact on societies and economies around the world, and the relevance of integrating a responsible investment approach is greater now than ever before.
If you want to know more about sustainable or ethical investing visit omnisinvestments.com/about-us/environmental-social- and-governance or get in touch
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
- Ethical investing usually involves avoiding companies that are engaged in activities that go against your principles, such as gambling, alcohol or firearms.
- Investing sustainably involves considering a wider range of issues – from how companies are managed to the impact they have on the environment and the roles they play in society.
- We incorporate ESG factors into our investment processes, and expect all our investment managers to integrate them too, as well as being signatories to the United Nations Principles of Responsible Investing.