Responsible investing's future  

Knowing the difference between ethical, responsible and impact investing

Knowing the difference between ethical, responsible and impact investing
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Climate change awareness and environmental concerns have never been more important, and over the past few years these issues have been spoken about in abundance when describing financial investments.

Three phrases in particular have been commonly used to describe investment products and strategies, but there is still confusion as to their exact meaning.

Mike Appleby, investment manager on the Liontrust Sustainable Investment team, outlined the difference between ethical investing, responsible practices and impact investing.

“Ethical investing looks to avoid controversial industries such as tobacco, arms, gambling, pornography, fossil fuels and big oil,” he says.

“Responsible investment typically refers to conventional funds that may avoid (small) areas of the market on sustainability grounds and possibly have some engagement with the management of companies in which they invest.

“Impact investing describes an approach where investors want to own companies with meaningful positive impacts and that are able to quantify the benefits to society or the environment which they deliver.”

Dan Kemp, chief investment officer of Morningstar’s EMEA division, says it is worth remembering that there is a lot of crossover between these three terms.

“There are no clear definitions, and so when an adviser is looking for products for their clients, it’s really important to understand that there's a lot of fuzziness between these terms."

Kemp says the most important thing, especially for investing ethically, is to have a conversation with clients to work out how they define these terms.

“There is no universal ‘ethic’. Ethics are essentially personal values, and everyone has their own ethics and personal values.

“What you’re trying to do as an adviser is to align [a client’s] portfolio with their values.

“The first part of that is understanding what their values are – which is a really important conversation to have – knowing what their options are in terms of product selection, and then aligning the two.”

He says the major “sticking point” with advisers at the moment is that a lot are not comfortable with having that initial conversation.

“One of the reasons they're not comfortable having it is because they don't have a deep enough understanding of the products available, and I think that's a perfectly reasonable concern.”

He says that on the other hand, advisers can see this conversation as a form of progression in their relationship with the client.

“You’re having a conversation on a much deeper level about things that the client cares about. 

“So actually, it's a way of building a much deeper relationship with that client. It’s a wonderful conversation for an adviser to have [and] the feedback that we have from advisers that are actively engaging in having these conversations is incredibly positive.