Explore the issues that different sustainable, responsible, ESG and ethical funds consider
The difference between sustainable and responsible investments (SRI) and other investments is that these funds pay close attention to issues that are frequently overlooked by other investment styles.
Most SRI issues can be grouped under the following headings:
Environment
Environmental challenges, such; as climate change, pollution, biodiversity, environmental management, waste management, the use of natural resources – including water, forestry, mining
Social
Issues that relate to people, such as; human rights, labour standards, child labour, equal opportunities, diversity, food supply, health and safety
Governance
Issues relating to company management, such as; board structure, diversity, executive remuneration, bonuses, avoidance of bribery and corruption
‘Traditional’ Ethical
Values based and ethical concerns, such as; tobacco, armaments, pornography, alcohol, irresponsible marketing or advertising, animal welfare, animal testing (for cosmetics, medical or pharmaceutical purposes)
And beyond…
In practices these areas can be subdivided into many dozens, if not hundreds of issues and sub issues. New issues emerge all the time and existing issues evolve as public and business concern shifts and new information arises. This makes SRI both diverse and dynamic – with new ideas regularly appearing on the horizon.
Different SRI funds focus on different issues. Some cover a wide range of issues, others focus on a small number. Some research issues in great detail, others are more high level. Many cluster issues together into themes such as ‘sustainability’ or ‘the environment’ – as these are areas of increasing importance and interest to both individuals and investors.
Whilst there is often a degree of consensus across the SRI community about some issues – for instance where there are international standards, legislative structures or clearly agreed upon ‘best practice models’, there are also many areas where fund managers take different views. As a result funds consider different issues and offer different strategies – which makes them (potentially) suitable for different people.
To make matters more complex, there are also usually positive and negative side aspects to most issues. So whereas one fund manager may say ‘this fund only invests in companies with strong environmental policies’ another may say ‘we avoid companies with poor environmental policies’. In reality these are two sides of the same coin. So, although this is potentially confusing the investment outcome for both funds may be similar – assuming both look for similar attributes and have similar research processes.
SRI Research
Many SRI funds are supported by specialist analysts who research green and ethical issues. Their work compliments research carried out by other analysts who focus primarily on traditional financial issues. SRI researchers may either work in-house (for a fund manager) or be externally contracted (working for a research company).
In some cases researchers may set an ‘approved’ list of stocks that the fund manager can invest in or help decide which companies fit a given fund’s investment themes or strategy. Some funds also employ external (occasionally ‘independent’) committees to guide this process.
The remit of such specialists varies but broadly their role is to ensure relevant fund managers have the information they need to make well informed decisions on companies regarding the SRI issues the fund sets out to cover. This can bring valuable insight that can support investment performance.
There is also an emerging trend towards integrating environmental, social and governance (ESG) information into mainstream investment strategies. Although in its infancy this is a significant development as it offers all investors the opportunity to factor ESG risks and opportunities into their investment decisions.
Published Information
For some individual investors details of a fund’s SRI strategy can play an important part of where they chose to invest. Others may be less interested. In either case an adviser needs to know enough about SRI options to be able to offer appropriate advice to the growing number of interested investors.
High level information about SRI strategies is normally published in marketing materials – although it is generally not as comprehensive or easy to find as information relating to traditional ‘financial’ investment issues or product details. Relevant information can also sometimes be found on company websites under headings such as ‘corporate responsibility’.
Addressing the difficulties advisers face finding relevant SRI information is one of the main purposes of this website. For those with an interest in this area there are also other sites with wider remits than this site – reading the principles listed on the UN Global Compact can be a very helpful starting point.
Summary
The number of issues covered by the various forms of sustainable and responsible investments has expanded rapidly and continues to evolve. This evolution is a welcome, necessary feature of this market which keeps it up to date, relevant and sometimes ‘cutting edge’.
Having a broad understanding of the range of options that is available can open up new opportunities for financial advisers. To understand how these issues are covered by fund managers – and therefore how they impact stock selection – see our section on ‘approaches’.
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