How investors can make a difference

In the past few years, there have been painful reminders of what happens when companies ignore environmental, social and governance (ESG) factors.

Classic examples are the BP oil spill in the Gulf of Mexico and the Lonmin mining fatalities in South Africa, events which had a devastating impact not just on corporate profitability but also did considerable damage to the reputation of the companies involved.

These events, coupled with growing consumer interest in issues such as climate change, fair trade, poverty and human rights has fuelled the desire for consumers to invest in companies that deliver on social and environmental performance in addition to looking at financial performance.

Taking a broader view of risk, and understanding the major demographic and structural shifts taking place around the global economy, can make a better investor.

Today, within the realm of responsible investment, consumers have a wide number of investment choices. ESG investments can be made in individual companies or through a fund that invests solely in companies that incorporate ESG into their corporate strategy.

A fund may choose, for instance, to invest in companies that focus on sustainable water projects or carbon-emission reductions, or the development of renewable energy or green transport.

Another fund may invest in ESG-related corporate bonds issued by UK companies – or look at investing in global equities issued by green companies. There are literally hundreds of responsible investment-focused mutual and exchange-traded funds that offer investors exposure to many different areas of the market.

Of course, all these instruments come with different levels of risk so investors can make decisions that suit their lifestyles. The wide range of products means that even if an investor has only a modest sum to invest, they can make a positive difference with their money.

When reviewing any investment literature, if anything is unclear, it is vital that potential investors ask questions about the fund and its investments. A well-run fund should be transparent on these issues, and investors should demand answers if the prospectus is not forthcoming.

Screening is a common tool used by fund managers to assess the credentials of companies in which they invest. Companies are evaluated from a negative stance, where specific companies are excluded from the investment strategy because of their involvement in particular areas; and a positive stance, where companies are specifically included because of their good ESG record.

Another form of responsible investment is shareholder activism, where people own shares in the company in which they invest and are able to exercise certain rights and responsibilities.

Growing numbers of responsible investors are using their roles as corporate owners to lobby for change on issues ranging from employee wages to lowering carbon emissions.

Shareholder activism is a way for investors to effect change and encourage more responsible business practices. This means investors could invest in companies that they feel do not exercise ESG oversight to try to bring about changes.

However, rather than invest directly in these businesses, there is a range of ethical funds that allow investors to pool their money with other like-minded investors to engage with companies.

Finally, community investing is another option for investors. These investments provide low-interest-rate loans to people in low-income communities, from villages in developing countries to blighted urban areas in major cities – communities that cannot access capital in traditional ways.

Community development banks and credit unions offer loans that finance affordable housing, small business loans and other local projects. Community development loan funds are non-profit institutions that offer financing for similar projects in low-income communities.

For investors wondering how they can make a difference, responsible investing is one of the most powerful ways to effect change. Investors can influence the behaviour of corporations and governments around the world, bringing about positive changes in society.

Fiona Reynolds is managing director of Principles for Responsible Investment (PRI)

ADVISER VIEWS

Martin Bamford, managing director, Informed Choice

We always ask our clients about their preferences for sustainable investment, but rarely find that investors are keen to pursue this sort of strategy.

Given the choice between accessing a wide range of investment funds and sticking solely to funds with sustainable characteristics, the vast majority of investors seem to prefer the former.

Patrick Connolly, certified financial planner, Chase de Vere

Many investors are interested in the concept of investing ethically. However, the overriding objectives for most investors are maximising returns and managing risk, and both these are more difficult to achieve if investing ethically.

If people have strong beliefs that they want to replicate through their investments, then the easiest way to do this may be through buying individual company shares. However, buying individual shares rather than collective funds will probably lead to the investor taking greater risks.

Diversification is a major problem for ethical investors, which is why ethical portfolios can be volatile. Ethical portfolios will avoid some sectors, such as tobacco, and typically have lower weightings in others like oil and gas.

So, overall while there might be some positive reasons for wanting to invest ethically, investors must accept they are likely to have to make some compromises – either on exercising their beliefs, or on their investment returns and volatility.