“The extinction of the natural world is on the horizon” Sir David Attenborough warned during recent climate talks in Poland1
Climate change is infamous for being a major threat to the world, but there are subtle ways to make positive environmental change. Although governments have a clear responsibility to overcome this global issue, we all have a part to play – which could include how we invest our money.
The desire to ‘do good’ with money is becoming a very popular trend. In recent years, different forms of socially responsible investing, including ESG (Environmental, Social and Governance) and Impact Investing have emerged with plenty more choice for investors.
As well as investing, consumers are choosing to spend their money with businesses that are considered to have sustainable business models and ethical practices, which might include the way in which employees are managed and treated.
What is socially responsible investing (SRI)?
SRI is an ethical way of investing your money, allowing you to align your investments with the causes you care about. In the past, ethical investing tended to avoid so-called ‘vice’ industries such as alcohol, tobacco, gambling, pornography and armaments. SRI also steers clear of companies where poor practice violates human rights, causes damage to the environment or involves animal testing.
SRI actively encourages change by focussing on industries and companies that have a positive impact on the world, its people and the environment. This might mean investing in businesses that promote social housing, environmental sustainability, alternative energy or clean technology.
Ethical investing progressed following the ‘Save the World’ campaigns of the 1960s, when organisations such as the World Wide Fund for Nature and Friends of the Earth lobbied hard to stop some of the unsustainable practices impacting the environment. Although SRI has developed significantly over the last few years, many believe it’s about investing into ‘green’ companies such as wind and solar farms, while others associate it with investors who take a laid-back approach to life.
How international politics can affect your investment options
Whether it’s reacting to or driving a more ethically responsible society, international political organisations like the UN are implementing guidelines and developing practices that address global challenges. These challenges include poverty, inequality, climate, environmental degradation, prosperity, and peace and justice.
In 2006, the UN’s ‘Six Principles for Responsible Investment’ were launched at the New York Stock Exchange. The principles offered a framework for incorporating ESG considerations into investment practice. Since the launch, the number of signatories has grown to over 1,800, representing a majority of the world’s professionally managed investments. This means that investors have more choice to align their finances with their personal politics.
What are the benefits of SRI?
There is growing evidence to suggest that ESG factors, when integrated into investment analysis, can offer investors potential long-term performance advantages.2
A major benefit is the positive impact it could have on your own conscience. For example, if you are against genetic engineering and intensive farming, you can take your capital where those practices are excluded. If you are prioritising climate change, you can choose to exclude industries involving coal, oil, gas and deforestation.
Historically, many of these ‘vice’ industries have returned healthy profits, but that does not sit well with investors who question what type of businesses to support. Having more choice means people have more individual power over how they used their money – not just as consumers, but as investors too.
There is plenty of evidence to suggest that SRI can match the returns of other investors, and many believe that companies behaving responsibly should outperform those that do not.3 As a personalised approach to investing, SRI lets people align their money with their values while they grow their capital.
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*The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested.
References:
1 https://inews.co.uk/news/environment/david-attenborough-climate-change-united-nations-extinction/
2 https://www.db.com/cr/en/docs/Sustainable_Investing_2012.pdf
3 https://www.tandfonline.com/doi/full/10.1080/20430795.2015.1118917
4 https://www.morganstanley.com/assets/pdfs/sustainableinvesting/sustainable-reality.pdf
Shane Presley is a Chartered Financial Planner for Lloyd & Whyte (Financial Services) Ltd. It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding of taxation and can be subject to change in the future. It does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain.