Responsible Investment Strategies

What defines Responsible Investment?

  • Importance of environmental, social and governance (ESG) factors
  • Long-term sustainable returns
  • Stable, well-functioning and well governed social, environmental and economic systems

Discover the 7 Strategies

This approach involves the selection or weighting of the best performing, or most improved companies or assets, as identified by ESG analysis, within a defined investment universe. This approach includes best-in-class, best-in-universe, and best-effort.

Active share ownership through voting, or proxy voting, is the primary means by which shareholders can influence issuers’ ESG strategies and practices.

Engagement may take the form of face-to-face meetings, running seminars, formal letters, calls, emails, writing reports and discussing management issues with senior company executives. Responsible investors of this kind also normally vote all their shares at AGMs and EGMs. Engagement occasionally culminates in shareholder resolutions – although these tend only to be used as a last resort by UK fund managers. Responsible engagement mainly applies to equity investments (shares) but can also apply to other asset classes, such as property and bonds.

Environmental issues concern any aspect of a company’s activity that affects the environment in a positive or negative manner. Examples include greenhouse gas emissions, renewable energy, energy efficiency, resource depletion, chemical pollution, waste management, water management, impact on biodiversity,etc.

Social issues vary from community-related aspects, such as the improvement of health and education, to workplace-related issues, including the adherence to human rights, non-discrimination and stakeholder engagement. Examples include labour standards (along the supply chain, child labour, forced labour), relations with local communities, talent management, controversial business practices (weapons, conflict zones), health standards, freedom of association, etc.

Governance issues concern the quality of a company’s management, culture, risk profile and other characteristics. It includes the board accountability and their dedication towards, and strategic management of, social and environmental performance. Furthermore, it emphasises principles, such as transparent reporting and the realisation of management tasks in a manner that is essentially free of abuse and corruption. Examples include corporate governance issues (executive remuneration, shareholder rights, board structure), bribery, corruption, stakeholder dialogue, lobbying activities, etc.

This approach systematically excludes companies, sectors or countries from the permissible investment universe if involved in certain activities, based on specific criteria. Common criteria include weapons, pornography, tobacco and animal testing. Exclusions can be applied at individual fund level, but increasingly also at asset management or asset owner level, across the entire asset range. This approach is also referred to as ethical, or values-based, exclusions – as exclusion criteria are typically based on the choices made by asset managers or owners.

Investments are often project-specific, and distinct from philanthropy, as the investor retains ownership of the asset and expects a positive financial return. Impact investment includes micro-finance, community investing, social business/entrepreneurship funds, and the French fonds solidaires. The growing impact investment market provides capital to support solutions to the world’s most pressing challenges in sectors such as sustainable agriculture, affordable housing, affordable and accessible healthcare, clean tech, and financial services. A hallmark of impact investing is the commitment of investors to measuring and reporting their social and environmental performance, and progress of underlying investments.  Investors’ approaches to impact measurement will vary, based on their objectives and capacities. The choice of what to measure usually reflects the investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:

  • Establishing and stating social and environmental objectives to relevant stakeholders;
  • Setting performance metrics/target related to these objectives, using standardised metrics wherever possible;
  • Monitoring and managing the performance of investees against these targets;
  • Reporting on social and environmental performance to relevant stakeholders.

This approach involves the screening of investments based in international norms, or combinations of norms covering ESG factors. International norms on ESG are those defined by international bodies such as the UN. They are generally understood to be universal, even if not universally applied or adopted, and they are fluid. This typically involves judging a company against peers or certain minimum standards. Once a screen has identified companies or assets that potentially violate these norms or standards, a fund manager may take a number of actions. The most common action is divestment, but before considering this step, the fund manager may prefer to engage with the company. However, the analysis process must ultimately have an impact on the fund portfolio.

At the margin, (1) Exclusions AND (2) international norms may converge, and a certain judgement is required to assign the correct classification. The threshold can often be seen in the fund manager referring specifically to outside norms, such as the UN Global Compact or the OECD guidelines for multinational corporations. Another distinction is that norms-based screening involves an analysis where a company is judged on a standard against peer companies or minimum standards covering ESG criteria.

Sustainability-themed investments contribute to addressing social and/or environmental challenges, such as climate change or natural resource depletion. Thematic funds focus on specific or multiple issues, such as renewable energy, energy efficiency, eco-mobility, sustainable buildings, waste or water management.