Building wealth for the future is important, but increasingly, people want their investments to make a positive contribution towards issues such as climate change, pollution and human rights.
Fortunately, there are ways to marry profit with principles, and it’s not a new concept. Decades ago, the original ‘ethical’ investments were launched. These typically excluded investments in companies whose products people found morally wrong. The variety and scope of these investments has expanded rapidly in recent years, with an increasing focus on positive actions taken by companies and an alignment with targets, for instance in respect to climate change, recycling or social improvement.
There are also lots of labels used to describe these investments – socially responsible, sustainable, ethical, responsible, green, impact and so on. This makes things a little confusing, which is why we have a dedicated section of our website, covering everything from defining the key terms to providing regular commentary on the major issues shaping the area.
What is Socially Responsible Investing?
Socially Responsible Investing (SRI) considers social and environmental good as well as financial return. It is often used as an umbrella term that encompasses various approaches, one of which involves incorporating Environmental, Social and Governance (ESG) factors in an investment process.
It encourages corporate behaviour that promotes environmental stewardship, consumer protection and human rights, and typically means considering (and engaging with companies on) key issues such as climate change, labour management, corporate governance, gender diversity and data security, among others.
It also usually means avoiding businesses involved in areas deemed harmful or unethical such as alcohol, tobacco, gambling, weapons or animal testing. Meanwhile, issues such as energy efficiency, water scarcity, safety, and diversity could be specifically targeted as investment themes.
While various forms of SRI are employed, there is no doubt that the overall movement has become increasingly popular in recent years. Our own research has found that almost half of UK investors (48%) expect to increase their environmental, social and governance (ESG) investments over the next three years, with one in six (17%) planning to do so significantly. During the pandemic there is evidence to suggest this popularity has grown even more.
What about investment returns?
SRI is not just about ‘doing the right thing’. Although it is often assumed that investing this way means sacrificing returns there’s a convincing investment case for doing so. Dubious practices are often ultimately punished by regulators or consumers, while companies providing solutions to sustainability challenges can be capable of strong growth.
It’s often assumed that SRI means sacrificing performance, but our analysis found that’s not necessarily the case. Investors have been significantly more likely to generate outperformance over the past three and five years from ethical or sustainable funds than from standard funds.
Most businesses are now aware there is increasing emphasis on transparency and high standards that go beyond the traditional financial variables that most investors have historically focussed on. Ultimately, this affects the extent to which they can attract capital and the rates at which they can borrow, so they have a vested interest in improving. The more people that invest responsibly the greater pressure there is on companies to improve, helping drive the pace of change. We expect this form of investing to have a considerable influence on companies’ actions and on financial returns going forward.
How to start socially responsible investing
- Think about why and how you want to invest. Is it for you or a child, and for what purpose is it – retirement or nearer term? This will dictate the type of investment product you use, such as an ISA, Junior ISA or Pension.
- Consider how much you are going to contribute and how often. Like any other form of investing, you’ll need to think whether you can invest as a lump sum, or will you invest in a series of lump sums or monthly contributions.
- How much risk do you want to take? This is usually connected to how long you want to invest for and how much you can afford to contribute. Maximising higher risk assets such as shares should be carried out over longer investing periods, while for shorter time periods (e.g. 5-10 years) you should generally use some lower risk areas, such as bonds.
- Find out your options available in terms of socially responsible fund options. If you are using an investment platform like Charles Stanley Direct, you will have plenty of options from different providers. If you are investing via, for instance, a workplace pension then there may be a more limited number available.
- Weigh up individual investment and fund selections. Selecting individual shares is an option, though this does take more commitment in terms of research and means it’s harder to get diversification, especially when investing small amounts. For most people, getting instant diversification, as well as the expertise of a specialist fund manager is going to be beneficial. However, it’s important to assess whether the values of that manager meet with your own.
You can find out more about SRI, including definitions of the key terms, on the dedicated section of our website.