Most people are aware of pressing environmental and social issues and would like to do their bit to help. Increasing numbers also want to invest in keeping with their values and help create a more sustainable world and inclusive society. But what does socially responsible investing look like in practice?
We have found when researching this area that no two investment funds are the same. Often, portfolios encompass various themes, commonly spanning a range of environmental, social and governance (ESG) issues. Yet funds place different emphasis on certain areas and will have varying policies on specific issues. It’s therefore important to check the fund documentation carefully to check if a fund meets your values, as well as your investment objectives.
A look at a fund’s holdings can also be instructive. A scan through these can help highlight themes, as well as flag up any holdings that on first inspection might seem controversial. Many socially responsible funds offer a high level of transparency and publish all their holdings, not just the top ten, making this a straightforward exercise for any interested investor.
As you might expect, companies providing solutions to environmental challenges, notably opportunities created by the transition to a low carbon and sustainable global economy, tend to be common holdings within funds focused on socially responsible investing. Other holdings might improve people’s quality of life or improve the efficiency with which scarce resources are used.
The theme of ‘sustainability’ tends to underpin many socially responsible funds, as well as a conviction that the companies that will survive and thrive into the future are those that acknowledge environmental and social challenges and try to address them. To give a flavour, here’s a sample of some of the interesting companies held in funds on our Direct Investment Service Preferred List.
Paper and packaging companies are caught at the centre of the waste debate and there are opportunities for companies that can operate sustainably. The UN Environment Programme (UNEP) estimates we recycle as little as 25% of waste globally.
Smurfit Kappa, held by Liontrust Sustainable Future UK Growth, is Europe's leading corrugated packaging company, and three-quarters of the fibres it uses are from recycled sources; the remaining 25% come directly from its plantations and trusted third-party suppliers. The fund’s managers see value in Smurfit Kappa’s responsible resource management, operational efficiency and products that help to reduce waste and resource use as well as increasing recyclability, reusability and degradability.
Plastic waste is a particularly challenging issue the world needs to address. One holding in EdenTree Amity International, Mohawk Industries, is a US specialist in flooring and one of the world’s largest recyclers of plastic bottles - more than 5.5 billion per year. It has also reused 25 million pounds of tyres to produce rubber mats and has introduced a take-back programme to recycle used carpets and integrate them into production of new products.
Leading Australian waste management and recycling company, Bingo Industries, is also held by Edentree Amity International. It provides waste collection, processing, separation and recycling services for local government and private companies, recycling more than 80% of the material it collects.
According to the Intergovernmental Panel on Climate Change (IPCC), we need to reduce total greenhouse gas emissions by approximately 50% by 2030 and to ‘net zero’ by 2050 to avoid runaway climate change. Many people fail to grasp the magnitude of the shift required and the potential consequences of not making these changes.
Baillie Gifford Positive Change invests in Ørsted (formerly Danish Oil & Natural Gas), which has expanded rapidly into renewables and now has the largest market share in global offshore wind. In 2017 Baillie Gifford calculates the company produced 8.5TWh of renewable electricity resulting in the reduction of 6.7mtonnes of CO2 emissions.
In 2018, Ørsted set new targets to complete its strategic shift into green energy and away from fossil fuels. By 2025 the company is set to produce 99% green energy and between 75-85% of all new investment will be in offshore wind. Ørsted, also a holding in the Threadneedle Social Bond Fund via its bonds, has pledged to uphold a high level of standards in worker’s rights, including occupational health, safety standards and social protection – ensuring it scores highly on a variety of ESG factors.
Held by Baillie Gifford Positive Change, Irish company Kingspan produces thermal insulation that helps to cut the amount of energy needed to heat the buildings in which we live and work. Over 80% of its sales come from building efficiency equipment, including insulation, and ways to make buildings more efficient.
Kerry Group, held by Liontrust Sustainable Future UK Growth, provides ingredients and flavourings to the food and hospitality industries. Kerry enables what it calls the ‘three Rs’: reduce, remove and replace. For example, this includes reducing calories, removing artificial chemicals and replacing them with natural alternatives. The Liontrust managers also admire Kerry for being managed for the long term and consistently investing in research and development to maintain leadership in the food technology space.
Improving water quality
Horiba is a Japanese provider of environmental instrumentation held by EdenTree Amity International. The company provides highly accurate measuring instruments for analysing water quality. The company also provides wastewater treatment and analysis and makes instruments that measure and analyse automobile exhaust gases.
Threadneedle Social Bond has invested in bonds of the UK’s three largest building societies, Nationwide, Yorkshire and Coventry, thereby helping to finance the provision of affordable banking services and mortgages to 12.6 million people across the UK. In addition, it invests in a social bond from African Development Bank whose projects are expected to lead to significant poverty reduction, job creation, as well as inclusive growth across age, gender and geography in Africa.
Learn more about Socially Responsible Investing.
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Socially responsible investing in action
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