We’ve seen an increasing level of interest in socially responsible investing over recent years from investors, regulators and asset managers. As investors, we have become more cognisant of the impact that our investments could have on the world today – and are generally more focused on the impact that today’s actions could have on future generations.
Socially responsible investing (SRI) is the umbrella term for any investment decision which considers good environmental, social and governance alongside an investment’s potential financial return. And what is that really looking to do? It is looking to incorporate an investor’s values within the investment decision making process. Within SRI, there are many facets, which move across the spectrum of balancing between financial return and social return.
The oldest form of investing to influence positive societal change is values-based investing which is often reflected through screening, of which there are two types. The first is positive screening, where you look for investments that have certain positive attributes. The second is negative screening, where you look to exclude certain areas from your investment universe.
More recently we have seen the evolution of Environmental, Social and Governance (ESG) integration, which is the area that’s currently under the most scrutiny. This is the integration of ESG factors into investment decisions. These factors address the non-financial aspects of a business, focusing on how a company conducts its business, rather than only considering what it does. If we move across the spectrum, we find sustainable investing. This is the search for investments that contribute towards a defined ESG objective. Sustainable investing also includes companies that commit no significant harm to both environmental and social objectives. Further across the spectrum we reach impact investing, which is investing with the intention of generating a positive and measurable social and environmental impact, whilst also achieving a financial return. Finally, at the far end of that spectrum we reach philanthropy, which is essentially charitable giving underpinned by an altruistic desire to improve human welfare.
SRI has the potential to greatly enhance our relationship with clients. It allows us to gain a deeper understanding of their investment objectives and ensure that their portfolios are fully aligned with their values. It will also enable us to provide clients with another area of information regarding their portfolio. It can be a key tool as we strive to enhance our clients’ knowledge of what we do – and how we make their money work for them.
As client interest in SRI grows, so will use of third-party data and other ways for financial advisers to demonstrate that they are acting responsibly. SRI has already made firms such as Charles Stanley take a long, hard look at the way in which we conduct our research. Where we historically focused on financial research and financial figures relating to a potential investment, the inclusion of ESG and other non-financial factors now requires a further area of research to be considered in the investment process.
Despite Brexit, we may still need to comply with various European regulations, such as the Sustainable Finance Disclosure Regulation. So, it’s not just at an individual investor level that SRI is becoming increasingly important. Regulation could be coming at us faster than many people are expecting – and these changes are going to be significant.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Socially Responsible Investing: The implications for UK financial advisers
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