What is responsible investing? A new focus on the ethics and impact of sectors has led to renewed interest in ethical investing.
If 2020 was the year of social distancing, 2019 was the year that environmental issues became mainstream. Whether it was Blue Planet II, the Extinction Rebellion protests or Greta Thunberg’s speech to the UN, this spotlight on personal and social responsibility also found its way into investment strategies with a renewed focus on environmental, social and governance (ESG) factors.
This has led to calls for investors to divest funds away from ‘harmful’ industries and sectors such as oil and gas, mining and airlines, which are some of the biggest producers of carbon and other greenhouse gases. This doesn’t just apply to organisations with millions of pounds at their disposal. Ordinary investors also have opportunities to ‘green’ their ISAs and pensions with advances in ethical investment approaches.
Ethical funds take a more principled stance on investment choice, screening out companies or sectors that do not meet their guidelines, which vary from fund to fund. Some older funds traditionally avoided sectors such as alcohol and armaments. Today many have a more environmental remit. However, while some funds exclude whole sectors such as oil and gas, others take a ‘best of breed’ approach, investing in companies with better records on issues like pollution, water waste and recycling.
ESG funds take into account environmental, social and governance (ESG) factors, alongside standard financial data, when deciding whether to buy or sell a stock. This can help identify whether the company is likely to be a profitable long-term investment in a world which is more environmentally aware.
For many, being able to make a difference, whilst not jeopardising the returns and risk control of a sensibly structured portfolio, may be something worth considering. This can be achieved by using systematic low-cost funds, where they are available, that overweight companies with better sustainability metrics and underweight those that are not doing such a good job. This is a relatively new world, where data and metrics are evolving, new products are being brought to market and in which there is no perfect solution.
All choices require trade-offs, and this applies to responsible investing too. Investors can take a first, yet meaningful, step towards a more sustainable world by sticking as closely to guiding principles as possible and moving at a prudent pace. That requires a well-thought out long-term strategy, implemented using sustainability-focused funds only when they are robust enough to earn a place in a portfolio.
Credit: Albion Strategic, Tax Briefs
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