Ian Thomas, Pilot Fiancial Planning
"Socially Responsible Investing"
Many investors have grown increasingly aware of the impact of certain companies and business practices on the environment. As a result, they are asking how they can align their investment decisions with their environmental views. They would like to use their wealth to gain an investment return and also to make a positive impact on the world in which they live.
The United Nations describes sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” With this framework in mind, business practices that exhaust resources or cause irreversible changes to the earth’s climate are considered unsustainable.
Sustainability investing is one approach within the broader socially responsible investing (SRI) universe. Other types of socially responsible investing incorporate ethical or social factors. For example, certain investment funds exclude companies that generate revenue from gambling, weapons, alcohol, tobacco or pornography.
The motivations for using one’s money for a purpose are wide and varied but when considering this area it often helps to identify the primary driver:
1. Investment growth – a return on capital
2. Impact investing – a return of capital
3. Philanthropy – a tax return
Based on an overall financial plan, you may like to allocate money to each of these ‘pots’, based on your own particular financial circumstances and objectives.
Donating money to charity or volunteering for a worthy cause are obvious instances of philanthropy but when it comes to striking a balance between investing to ‘do good’, whilst also generating some kind of return, the picture is more complex.
Certain Enterprise Investment Schemes, microfinance projects, peer to peer loans and social enterprises are examples of impact investment opportunities. The investors’ main motivation is typically to make a difference, often to a business or project where they feel some kind of direct connection (although decent investment returns are not impossible either!). Many of these investments are, however, highly speculative and really only suitable for experienced or wealthy investors who could afford to lose all of their invested capital if things were to go wrong.
A number of more mainstream SRI funds, where investment returns are the dominant objective, use positive or negative screening techniques to filter the regular investment universe of listed companies. The idea is to either include or exclude stocks based on a series of social or environmental standards - an approach that may sometimes exclude whole sectors of the market. This, in turn, can cause a lower, or more volatile, investment return when compared to other ‘standard’ funds. In fact, the stricter the screening criteria, the more these funds start to resemble pure impact investments.
Other SRI fund managers take a different approach. They aim to provide broad diversification across the equity market and then apply an overlay based on third-party research that rates companies on multiple SRI criteria. By investing in companies that score highly and reducing exposure to those firms in each sector that lag their peers, this approach gives investors a way to reinforce environmentally sustainable (and/or other socially responsible/ethical) business practices while pursuing their long-term investment goals through a broadly diversified strategy.
The increasing popularity of environmental and other socially responsible investments of various descriptions is certainly starting to make a difference. In the US, over £3.7 trillion of professionally managed assets (11%) are now held in SRI funds. In Europe the figure is even higher at £6.7 trillion and, with so much money now channelled through these funds, no listed company, large or small, can afford to ignore the issues. As the saying goes: ‘money talks!’
If you’re interested in knowing more - why not give Ian Thomas a call on 01803 839 194? Alternatively, send him an email at ian@pilotfinancialplanning.co.uk. He’d love to hear from you!
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First published By The Dart July 2014