What is Responsible Investing?

What is Responsible Investing? (1)

As a firm actively engaged in the asset management industry, we find it important to remain aware of the key trends & topics that are shaping the future of the industry (and the economy as a whole). In that vein, this is the first of a series of posts exploring responsible, sustainable, and impact investing.

A later post in this series will consider whether visuals like this are really sending the right message...

Responsible investing. Sustainability. Impact. UN Sustainable Development Goals. Environmental, Social, Governance factors. UN Global Compact... The list goes on…

These are just some of the sustainability-centric terms and concepts that are increasingly being discussed at a high (strategic) level at most AM firms today. Is it a response to market demand? Does investing responsibly lead to better returns? Is it just a marketing gimmick? Will responsible investing become a dominant theme in the next 5, 10, 25 years?

These questions, and more, will be the subject of a series of posts we’ll be publishing over the course of the next few months. But for now, let’s start with some definitions as a primer!

Responsible Investing:

The practice of explicitly including ESG factors into an investment approach in terms of asset selection, as well as considering one’s own role (as an owner of said assets) through the lens of sustainability. The approach complements traditional asset evaluation and portfolio construction techniques, and aims to enable a better overall long-term risk/reward profile.

Impact Investing:

Involves investments that are “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return” [1]. Crucially, impact investors often commit to tracking the social/environmental performance of their investments in tandem with the financials.

ESG Factors:

ESG stands for Environmental, Social, and (corporate) Governance. Factors related to these themes are used to assess a company’s sustainability. Analysts look to combine a blend of qualitative and quantitative data points based on these factors in order to generate a sustainability rating that can be integrated into the overall investment process. In an upcoming post, we will dive into what these factors look like for each theme, how they contribute to a final sustainability rating, and how this can be used to build a portfolio.

UN Sustainable Development Goals:

The UN SDG’s are 17 global goals set by the United Nations General Assembly. They were established in 2015, aiming to be met by 2030. For the full list of goals, click here.

PRI:

The Principles for Responsible Investment initiative comprises a global network of investors working to execute on 6 core principles. The signatories aim to develop a more “sustainable global financial system”[2]. The PRI is supported by the United Nations, and has garnered more than 1700 signatories from 50+ countries around the world.

Greenwashing:

The term ‘greenwashing’ refers to the practice of overstating or otherwise
mis-portraying a company’s services/products as being more sustainable than they really are. In a market where consumers are increasingly willing to pay a premium for so-called ‘sustainable brands’ (up to 66% according to a Nielsen [3] report), companies are scrambling to bend the truth and vie for a slice of the pie.