For anyone with a bank account, life insurance policy, pension, savings or investments, it’s alarmingly easy to provide inadvertent funding for activities you don’t support.
Who can be sure, for instance, that their bank is not financing an arms deal? That their funds are not invested in heavily polluting industries? Or in companies that use exploitative labour to manufacture their goods? Much of the problem lies in the fact that our savings, pensions and investments are usually pooled, before being invested on the stock market, usually with only one objective: to maximise returns.
Choosing investments that reflect your values
Responsible investment means different things to different people and covers all manner of investment approaches - such as ethical, sustainable and ESG investing (concentrating on environmental, social and governance issues). Responsible investment allows you to take a view on the companies in which your money is invested. It permits you to avoid companies whose activities you do not wish to support, whilst investing in those whose practices and values reflect your own values.
By applying ESG and ethical criteria to your financial decisions, you are making a stand for change. You are balancing your desire to make a return from your money with your concern and respect for wider social and environmental issues.
You are also contributing to the overall demand for ethical financial planning. As the more principled segment of the finance sector grows, other institutions, banks and multinational corporations will come under increasing pressure to move away from irresponsible practices, towards a more sustainable model.
Far from being a new idea, responsible investing can be traced back to religious movements of the 19th century, including the Quakers and Methodists.
It is only over the last three decades that the practice has gathered momentum. Thanks to a huge increase in awareness of global environmental issues and corporate social responsibility, people and businesses are seeking a more sustainable ESG approach. An approach which encourages development, but only if it can meet the needs of the present without compromising the needs of future generations.
Consequently, responsible investing is now one of the fastest growing financial advice sectors. The growth of greener companies and businesses specialising in renewable energy and environmental protection, has opened up a host of opportunities for ethical and ESG fund managers.
Assets Under Management in UK green and ethical ESG funds has shown phenomenal growth in 2021 to £61.12 billion, according to the figures prepared by the EIRIS Foundation - an independent provider of research into corporate environmental, social and governance performance (1).
Responsible investment needn’t sacrifice performance
An increasingly discredited view has circulated in some quarters that investing responsibly will result in disappointing performance, especially when compared with conventional funds. The myth states that choosing from a more restricted investment universe of responsible funds will diminish financial returns. However, it is just that – a myth – and one that appears to ignore the recent downfall of a number of high profile and distinctly non-ethical investors.
The simple response is that investing responsibly should have no long-term financial impact on the performance of your investments, although the short-term performance may well be different from that of more traditional investment approaches.
Either way, it all comes down to the skill of the fund manager. A conventional fund manager may beat, match or undershoot the return of the chosen index or benchmark, whether funds are responsible or otherwise. If they are proficient enough to select a portfolio of stocks that “beats the market”, applying responsible criteria should not affect their success. In fact, performance-wise, evidence shows that responsible funds can match and even out-perform mainstream, traditional funds.
The message is clear: meeting your financial goals and promoting your personal values are completely compatible in the investment world.
Running a successful business is about much more than just the finances. The stewardship of your investments should be no different.
(1) https://eirisfoundation.org/marketsizing2021/
Learn more about responsible investing approaches here.