Norms-based investing is centred on commonly accepted social values that set out a minimum standard for investment in financial assets.
The term responsible investing is often used to describe investment of this type (and is becoming a minimum standard for professional investors). Often these standards are set out by international organisations like the UN or at national level.
For example, the Netherlands amended its market abuse decree in 2013 to prohibit investment in companies partaking in the manufacture of cluster munitions. Other common characteristics of responsible investing include stewardship or shareholder engagement, where portfolio managers vote on company resolutions and meet with management to discuss concerns.
To formalise this process the custodians of capital often sign up to industry codes of practice such as the UK Stewardship Code. This outlines seven principles for institutional investors to follow, number one being to: “publicly disclose their policy on how they will discharge their stewardship responsibilities”.
Values-based investing, often referred to as a ‘darker shade of green’, incorporates commonly used terms like ethical or impact investing and places higher importance on what is an acceptable investment.
This is a narrower and more prescriptive area within responsible investment and is normally where the term sustainable investing would sit. It is also where personal preferences begin to influence investment decisions to a greater degree.
Initially this began with negative screening – the exclusion of companies that did not meet a prescribed ethical standard. For example, all tobacco producers will be ineligible for investment due to the negative impact cigarettes have on consumers’ health. As a percentage of assets under management, negative screening remains the most significant style of sustainable investment. As expertise in the area has increased more recently, however, managers are now able to do the opposite and ‘positively’ screen companies.
By showing commitment to best practice and industry leadership, companies can be singled out for investment and this can even include companies in sectors that you would not normally expect in an ‘ethical’ portfolio.
Environmental, social and governance integration
Integral to the research process for both positive and negative screening is the analysis of so called environmental, social and governance factors.
These three terms are broad, but advisable streams to explore when trying to pinpoint the future success of a company, much like a SWOT [strengths, weaknesses, opportunities, and threats] analysis helps explore the competitive environment of a business.
