If you’re considering how to invest more responsibly or how your money could be used to make a difference to the environment or society, it’s important to understand some of the myths around responsible investment.
Responsible investment focuses only on the environment
Responsible investment is often used interchangeably with terms such as green investing or sustainable investing – but this is incorrect. Whilst some investors and certain funds may focus on improving the environment, this isn’t the definition of what a responsible investment is. To establish what makes a responsible investment, three industry-defined factors (environmental, social, and governance – or ‘ESG’) are used by fund managers to assess how companies measure up and whether they’re right for responsible investment. As well as covering environmental factors, this also covers:
- how companies market and sell to consumers
- employee engagement and diversity
- human rights
- health and safety
- community engagement and investment
- executive pay
- board diversity and structure
- reporting and audit practices
- bribery and corruption
Investing responsibly means lower financial returns
For actively managed funds and investments, added work that fund managers do to assess whether companies are being managed in a responsible way can add financial value for investors, by helping to determine whether a company is sustainable and/or exposed to excessive risks. Put simply, companies that are run responsibly and sustainably are often good, well-run companies from an investment perspective as well.
In addition, industries that may be selected for responsible investments – such as renewable energy and green transport – can be well-positioned to take advantage of the ways in which the world is changing. Growth in these industries can potentially bring healthy returns for investors too.
It’s important to remember that, as with any investment, the value of your investment can go up and down and you may get back less than you invest.
Responsible investment is one specific type of fund or product
Responsible investment is an umbrella term which spans a number of different approaches that fund managers use to invest people’s money.
This covers a wide range of investments – from funds that invest with a specific aim of ‘putting money to good use’ to solve specific problems such as environmental issues – to funds that might invest in any type of company which is managing environmental, social and governance factors effectively.
As a result, funds suitable for responsible investors aren’t always labelled as ‘green’ or ‘ethical’ but may still be considered responsible investments. Speak to your wealth manager about what’s important to you when investing responsibly. Together you’ll be able to formulate a personalised plan so your preferences can be taken into account, alongside your risk appetite and financial goals
Investing responsibly is about excluding unethical investments
A common misconception is that responsible investment places blanket exclusions on specific industries and companies deemed ‘unethical’. Whilst this is true for some types of funds and investments, it’s not always the case, and the extent to which a fund manager excludes certain areas varies.
For example, whilst a fund manager may not exclude an entire industry from investment, they may select companies within the industry which are more sustainable and responsible compared to others. Likewise, fund managers who assess environmental, social and governance factors to identify responsible investments don’t necessarily exclude any type of investment – instead, this extra analysis provides another layer of information, enabling the fund manager to make more informed decisions.
Finally, some active fund managers consider it better to invest in companies that may not traditionally be viewed as ‘responsible’ or ‘sustainable’ and use their influence as shareholders to drive positive change.
Investing responsibly means you’ll have a narrow field of investments to choose from
Investors who diversify their investments – that is, those who invest in a range of different funds, sectors and industries – may achieve a better return over the long term than those who put ‘all their eggs in one basket’, so it’s important to have a broad selection of investments to choose from.
As the myth above explains, responsible investment is not usually about excluding broad sectors, industries, or regions. Instead, a fund manager could invest in any company, depending on their own criteria for choosing investments and how the company is run.
In addition, because the responsible investment process a fund manager undertakes is designed to uncover risks to a company, this can help reduce risk and improve returns for investors in the long term.
Finally, rather than choosing to invest all your money in responsible investments, you may decide to have one responsible investment as part of your wider portfolio. Your wealth manager will recommend what’s right for you, taking into account your attitude for risk, your beliefs and values, and the financial returns you wish to achieve.
Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.
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