Common themes of socially responsible investment

Examples of SRI themes, according to Jamie Sutton, director of Premier, include:

1) Climate change mitigation, including lowering carbon emissions

2) Reduction in environmental pollution and protection of valuable natural resources

3) Fair, open and resource sustainable operating practices

4) Protection of social, economic and cultural rights

5) Development of training in the workplace while protecting the social and cultural rights

6) Employment opportunity and access to medical care in deprived regions

7) Provision of clean, reliably sourced water that improves the quality of people’s lives.

While the number of options available to clients will vary with asset class and client size, Simon Howard, chief executive of UKSIF, says a high and growing degree of refinement is possible in order to meet client needs.

Mr Howard says six investment styles can be identified:

1) Sustainability themed: where the manager identifies themes which they expect to benefit as sustainability pressures bite and investment is focused on those themes.

2) Norms-based: sees potential investments screened in/out depending on whether they and their suppliers meet/fail to meet international norms such as those of the International Labour Organisation on child labour.

3) Best-in-class: manager chooses those companies in a sector/universe that perform best on chosen criteria.

4) Integration: manager considers environmental social governance and other sustainability factors as a core part of their normal investment approach.

5) Exclusion: companies in sectors that are deemed to be “bad” aren’t held. Typical exclusions are alcohol, gambling and land mines. According to Mr Howard this style can easily be applied on a passive basis.

6) Engagement and voting: managers seek to influence company behaviour on a long-term basis with detailed contact and engagement.

Charlie Thomas, manager of the Jupiter Ecology fund, says what advisers will find is that socially responsible investment used to be about avoiding ‘bad’ companies and sectors on ethical grounds.

To an extent, Mr Thomas says this still stand as many funds classified as ‘SRI’ employ negative screens, meaning they avoid activities deemed beyond the pale. Mr Thomas says positive screening is now also prevalent, whereby investors seek more socially beneficial activities.

Mr Howard says a common feature is that all of the SRI approaches adopted by managers focus on the long term rather than the short. As a result, Mr Howard says SRI funds are investment funds rather than ‘trading funds’.

He says all either consider a wider range of factors than some forms of conventional investment or accord them a higher weighting in decision making.

All would typically use a high-level of company engagement to develop a long-term relationship and knowledge of investee companies, Mr Howard says.

Examples of factors that might be considered include company impact on the environment, treatment of company employees and those of suppliers, and incentives for management.

As well as reflecting values held by many clients, Mr Howard says all of those issues are important for hard financial reasons - increasingly so, in fact.

Mr Howard points out environmental impacts may lead to expensive litigation; poor treatment of staff can damage a firm’s reputation in the eyes of its customers; and excessive pay for management can also harm a company’s standing.

In addition to the common themes, Neil Cowell, head of UK retail sales for Vanguard, says a key consideration for advisers looking at the variety of SRI funds available is the screening process. The most common screening processes taken by SRI managers are “negative” and “positive”.

The first approach prohibits investment in companies with activities and policies deemed most objectionable in terms of their impact on society at large based on the theme. The latter invests exclusively in companies that have a demonstrated commitment to socially responsible business practices and policies.