Most people will make some kind of investments during the course of their lifetimes, yet many do not really know where that money is actually going to.
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.