There is a misconception that responsible investing is the same as sustainable, ethical, impact and socially responsible investing, according to the Principles for Responsible Investment.
Responsible investing, the body says, is a “strategy and practice to incorporate environmental, social and governance factors in investment decisions and active ownership. It complements traditional financial analysis and portfolio construction techniques”.
Will McIntosh-Whyte, fund manager of the Rathbone Greenbank Multi-Asset Portfolio funds, says there are multiple approaches to responsible investing, as well as a variety of ways to analyse companies for their sustainability credentials.
According to the PRI, approaches to responsible investing are typically a combination of ESG incorporation and active ownership.
| ESG incorporation: considering ESG issues when building a portfolio | Active ownership or stewardship: improving investees' ESG performance | |||
| ESG issues can be incorporated into existing investment practices using a combination of three approaches: integration, screening and thematic. | Investors can encourage the companies they are already invested in to improve their ESG risk management or develop more sustainable business practices. | |||
| Integration | Screening | Thematic | Engagement | Proxy voting |
| Explicitly and systematically including ESG issues in investment analysis and decisions, to better manage risks and improve returns. | Applying filters to lists of potential investments to rule companies in or out of contention for investment, based on an investor’s preferences, values or ethics. | Seeking to combine attractive risk-return profiles with an intention to contribute to a specific environmental or social outcome. Includes impact investing. | Discussing ESG issues with companies to improve their handling, including disclosure, of such issues. Can be done individually, or in collaboration with other investors. | Formally expressing approval or disapproval through voting on resolutions and proposing shareholder resolutions on specific ESG issues. |
| Source: Principles for Responsible Investment | ||||
“While the end goal [of responsible investing] is often similar – to do the right thing for the environment and society – we think it's crucial to understand the differences between each approach because it helps investors to make informed choices about where they are putting their money,” says McIntosh-Whyte.
“While not a new concept, responsible investing has accelerated into the mainstream, but terms such as responsible, sustainable, ESG and impact investing are just a few of the terms that are frequently used interchangeably. The cynic in me also fears that this confusion can be exploited.”
Indeed, research from Boring Money found that greenwashing was one of the biggest concerns for financial advisers when it comes to ESG. Seven in 10 (69 per cent) said it was a concern for their business, with one in five (20 per cent) saying they were very concerned about the risk, and half (49 per cent) saying they were somewhat concerned.
According to the Treasury, the lack of common definitions around environmental sustainability is leading to greenwashing, when misleading or unsubstantiated claims about environmental performance are made by businesses or investment funds about their products or activities.
In October it announced the chancellor had published a roadmap outlining future standards for environmental reporting to “weed out” greenwashing and support the transition to a greener financial system.
Ryan Medlock, senior investment development manager at Royal London, says: “Regulation is imminent. The Treasury’s Greening Finance: A Roadmap to Sustainable Investing [paper] confirms that, along with the Financial Conduct Authority, they are looking to implement potential requirements including understanding investors’ sustainability preferences to ensure the suitability of advice.”
According to the Treasury's policy paper, the lack of common definitions makes it difficult for companies and investors to clearly understand the environmental impact of their decisions and can lead to consumer harms.
“This risks limiting the flow of capital into sustainable investments and ultimately slowing the UK’s progress to tackle climate change and other environmental challenges,” it adds.
The roadmap also details a future UK green taxonomy that aims, among other things, to create “clarity and consistency for investors. Investors will be able to easily compare the environmental performance and impact of companies and investment funds to inform their financial decisions”.
