4 minute read
NAVIGATING THE PATH OF RESPONSIBLE INVESTMENT
by Jake Moeller, Square Mile
It would be difficult today to not be aware of the challenges currently facing our planet. Popular television documentaries and a constant stream of news flow about unusually catastrophic floods and wildfires are a constant reminder that something isn’t quite right. Environmental and social issues are becoming more entrenched and harder to ignore, whilst people everywhere are growing increasingly concerned for the future of our planet and for society’s ability to function for the greater good of everyone.
In recent years, a significant shift has taken place in the world of finance, with responsible investing emerging as a powerful force driving change. With investors placing greater emphasis on ensuring their money is used to help create a positive impact on the world and society around them, the concept of responsible investment has gained momentum.
What is responsible investing?
In short, responsible investing involves actively seeking to do good, avoid doing harm, and driving change by investing in companies that address urgent global challenges, while avoiding those perpetuating problems.
Given the subjectivity around what constitutes responsible investment, a useful place to start is the spectrum of capital. From traditional funds, where the primary objective is to generate a financial return, to those which prioritise using investment to create a positive impact, there are four categories of responsible investing which illustrate this spectrum: healthcare needs.
• Ethical Exclusions - avoiding industries and practices that harm people or the planet, for example excluding tobacco and alcohol, gambling or companies which produce or distribute fossil fuels.
• Responsible Practices - evaluating the operational practices of invested companies, supporting 'best practice', and encouraging improvement in environmental and social performance. An example of this would be encouraging a food retailer to seek to reduce the environmental impact of its supply chain and operations.
• Impact Investing - creating a broader positive social or environmental impact. Investments are substantiated with evidence of the social and environmental impact achieved through companies' core products and services.
It is important to note that these approaches are not mutually exclusive, all of them can be used simultaneously to help make well-informed investment decisions.
Evidencing responsible investment
While the responsible investment market has been growing, clear and tangible metrics to demonstrate a fund's positive and negative impacts are developing and standardised reporting metrics to help investors interrogate the funds they are considering are not always available.
Despite the difficulties, it is still possible (and necessary), to assess a fund's commitment to responsible investment. Transparent reporting is fundamental to evidence responsible investment outcomes; clearly stating what a fund is aiming to achieve, demonstrating its success in achieving this, and where it falls short, clearly explaining why. Evidence should be provided using whatever data is available, presented in a standardised and accessible way. For example, if an
It can also be a good idea to compare any and all of a fund’s marketing materials with other fund documentation. For instance, look at the Key Investor Information Document alongside a fund factsheet. By comparing them in this way, investors can help ensure that a fund’s objectives are consistent across all documentation, making the fund’s aims and targets that much clearer.
Case studies can be invaluable. They should explain what a company does and a manager’s thesis for investing in it, describing the challenge a company has identified, how it addresses this, and key performance indicators applied to demonstrate success. For example, if a fund claims to focus on combating climate change but holds significant investments in fossil fuels without a clear explanation, this may raise concerns and warrant further investigation.
Responsible investing is more than just a passing trend; it is a fundamental shi that reflects the evolving expectations of investors and the broader global community. As the world continues to face complex challenges, from climate change to social inequality, responsible investing offers a pathway to a more sustainable and equitable future. We are, however, on a journey of progress, and the metrics against which responsible investment metrics can be measured will continue to evolve, and every step towards a consistent and transparent framework should be seen as positive.
