The investment industry tends to use complex and confusing terminology. Descriptions such as Green, Ethical, Sustainable, and SRI, have all been used to describe this area. All these descriptions could be covered by Responsible Investing.
RI simply means investments that, in some way, make a positive contribution to the physical or social environment, upon which we depend for the future sustainability of our world.
These contributions can be made in different ways, however. See our Responsible Investing Spectrum
This is an outdated myth perpetuated by people who simply don’t understand the RI industry today. Rather than be a drag on performance there is plenty of evidence to suggest that RI investing is more financially sustainable than a conventional investment.
RI fund managers are not solely concerned with traditional financial analysis. They also consider the effects of Environmental, Social, and Governance factors (ESG). This is important because companies who look after their environmental footprint and social impact as well as their ethical business practice have a significantly greater chance of delivering sustainable returns. This is particularly true in the current economy of resource constraints, need to get to Net Zero, and increasing regulation.
See performance of our RI portfolios and examples of holdings in our newsletter
It is easy to be cynical about whether your investment can make a social or environmental difference or not. However, your pension and investment funds are part of a private sector that is helping to drive big social and environmental policy changes that will benefit everyone on the planet in the years to come.
For example, in 2009, less than 7% of our electricity was generated from renewable sources, today that figure is above 40%, greatly supported by private sector finance. This demand for finance will only increase multi-fold in our aim to achieve our Zero Carbon Target.
RI fund managers will also be keen to tell you about the companies they are investing in as well as hearing of the positive changes they are making.
They will also engage with their holdings to help drive positive change.
The stock market collapsing in 2008 revealed the danger of having a lack of transparency as to where investors’ money was being invested. Now, more than ever, investors are concerned what is happening with their investments.
For too long, investors have just seen the stock market as a homogenous block whilst in reality there is a huge variation in the activity and behaviour of companies making up that market. It is, therefore, logical to see what’s under the bonnet of your fund to satisfy yourself that it will deliver both the performance and the RI impact that you want and expect.
Good RI managers will disclose all their holdings and will report back on the impact of those stocks, both good and bad. They are happy to discuss openly what’s in their recommended funds. It is in their interest to show you that their funds deliver, both in terms of financial returns and social impact.
Recent surveys have revealed that investors are far more interested in influencing a more sustainable future than finding companies that are whiter than white.
We are living in the real world, and just as we are transitioning to a better future then so are the many companies out there in the economy.
Asset Managers are aware now of their responsibility to move capital in the right direction, and therefore engagement with holding companies is seen as essential activity.
Good RI managers will frequently disclose voting and engagement activity. For the major issues, such as achieving zero carbon, they will form collaborations with other managers, and many have now declared zero carbon targets to apply greater pressure on their holding companies.
We are all affected by own experiences and so you may have a particular social, ethical, or environmental issue that is particularly pertinent to you. Don’t be afraid to mention this. There is an ever-growing market of funds and products that can meet your individual needs and preferences.
RI is no longer the new kid on the block. The value of specific SRI funds under management in the UK has increased massively over the last 20 years. In addition, it’s estimated now that around 25% of global assets under management take account of Environmental, Social and Governance factors.
It will also continue to mature reflecting our ever-increasing demand for a more sustainable lifestyle, whether this is healthier food, more recycling or saving energy.
Sensible investors understand that risk needs to be considered in a wider context when planning an investment portfolio. Research suggests that it is prudent to include a spread of asset classes and investment style when building a well-balanced portfolio.
In the past, the RI sector was criticised because it did not offer such opportunities for diversification, but this no longer applies. RI funds now include a variety of different asset classes including stocks, bonds and property. This is because the need for responsible investing is pervading across the whole investment universe.
A good indication of this is the availability of many RI portfolios in the marketplace.
You should not feel guilty if you only invest a proportion of your money in this area to start with. This could be a new area for you and like anything you will want to judge the success of it first.
Like all forms of lifestyle, we are changing to be more sustainable, the direction of travel is the most significant point.
The real challenge for the RI industry is to move from the margins to the mainstream. As it does so, the increase in funds will allow the sector to have an even greater impact on the social and environmental challenges that face us. As more traditional investors like you move more of their funds into the RI sector, the pace of these changes will accelerate, benefiting everyone.
Unlike more traditional investment approaches, RI allows you to be part of an active movement pushing for long-term positive change. This is a movement that has journeyed from the margins to the mainstream. The demand for socially and environmentally responsible investment has never been greater. Indications of the value to be gained from supporting a sustainable economy can be clearly seen in the way governments around the world are framing their economic policies. Be part of this exciting movement.
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