The notion that money is the root of all evil is a popular cultural meme, but anyone with wealth knows that it’s also the solution to many global problems. Investments can galvanise businesses towards positive environmental, sociocultural, and organisational change. Investors who care about making a difference are often drawn towards Environmental, Social & Governance (ESG), or Socially Responsible Investing (SRI) options. Read on to find out why.
ESG, SRI, And ‘Impact Investing’
Whether it originated as inheritance, sheer hard work, or a combination of both, anyone with a sensible amount of money is likely to be a wise and agile investor. Increasingly, desire for returns is intertwined with the bigger picture - socially meaningful investments being integral to the portfolio. Environmental, social, and governance (ESG) investing, socially responsible investing (SRI), and impact investing are all ways of ensuring that your wealth makes a positive impact in the world.
What’s Different About ESG Investing?
When investments are made in a way that is environmentally and socially responsible, they are known as ESG, or ‘ethical’ investments. A list of factors is used to determine a company’s ESG score, which includes topics such as pollution, community engagement, health and safety, and transparency. In general, keen attention to details such as the minimisation of waste, avoiding child labour, and high levels of disclosure will improve the overall financial performance of an organisation, making ESG funds both ethical and rewarding. Known as ‘positive screening’, the approach places a monetary value on various sustainability measures, translating an action such as the sustainable sourcing of materials into its potential financial return.
Who Should Choose ESG Investing?
As the ESG focus is very much on creating profit, it is an attractive option for the majority of investors. The general idea is that a company that steers clear of environmental and social harm will generate greater profits in the long-term than one that receives negative PR, resulting in greater returns for investors. The justification for this is the growing importance of Corporate Social Responsibility (CSR), which is popular with consumers and increasingly regulated. In this paradigm, ESG is a logical way to make the most of a financial opportunity regardless of whether or not CSR matters to you personally. To invest in an ESG fashion you need not compromise returns, and in fact could see greater returns by investing in companies viewed positively by the world. ESG-based investing can be viewed as a starting point for building a broader ethical investment portfolio, as it produces good returns whilst encouraging organisations to improve their impact, regardless of the type of ESG investing you choose. Further, specialist investments can then be explored to help solve the big issues we face.
Are There Any Ethical Drawbacks To ESG Investing?
CSR can be misleading at times. By making charitable donations, ensuring employee welfare, and recycling, companies can tick the required boxes for environmental, social, and governance actions. However, if that company is an oil giant or arms manufacturer, it might seem like the negatives swamp the positives. Therefore, unless due care is taken by your adviser to ensure no ‘greenwashing’ is taking place, ESG investors could be disappointed to find their investment portfolio consists of companies they fundamentally want to avoid.
What If I Want To Focus On Making A Really Positive Contribution?
Many experienced investors find themselves in a situation where making a positive impact has become equally as important as the returns. This is where another type of ESG based investing, Socially Responsible Investing (SRI), comes into focus. SRI choices are typically based on personal value systems, such as avoiding organisations with links to child labour, firearms, or tobacco. In this approach, companies are scrutinised for their suitability, and only those that share the principles of the investor are selected. With an SRI portfolio, profit remains important, but it is always balanced with a range of sharply defined ethical considerations.
I Want My Investment To Make A Difference: What Next?
It’s often the case that the correct solution is a blend of ESG and SRI investment options. However, this can only be achieved with a partner who is experienced at working on an exclusionary basis, as negatively screening is a much more involved process. As such, the best place to start is by contacting a professional team who can discuss your plans and preferences. To find out more about how your investment portfolio can make a difference in the world, have a chat with one of our wealth management team at Arlo Group today.