Profits and principles – what is responsible investing?

If you want the potential of your investments growing over time, without having a significant negative impact on the environment and society, responsible investing could be for you. And it doesn’t have to come at a price, you could have profits and principles.

Remember though, investments fall as well as rise in value so you could get back less than you put in. There are lots of different ways to invest responsibly. But the three main ones include: investing with an awareness of Environmental, Social and Governance (ESG) issues, avoiding the worst offenders and investing to make a positive change.

We look at these approaches in more detail below. This is not personal advice. So if you're not sure which approach is right for you, or don’t know where to begin, we have experienced financial advisers who can help.

Investing with an awareness of ESG issues

All fund managers will look at a company's financial position, competitive landscape and opportunities for growth before they invest. But a growing number also consider ESG factors, and it's easy to see why. The way a company’s managed, or its effect on the environment and society, can cause reputational damage, impact profits and drag down a company’s share price.

In a world dominated by social media, this matters today more than ever. A company's misdeeds can appear on the news feeds of millions in a matter of hours, potentially sparking outrage, backlash and even boycott.

Most ESG-focused fund managers also vote on shareholder resolutions and engage with company managers to lobby for improvements that could boost returns and improve the way the company’s managed.

Useful tools to help check a company’s ESG credentials

Avoiding the worst offenders

Some investors can't stand the thought that some of their money could be supporting morally questionable companies, like those in the tobacco or munitions industries. Exclusions-based funds don’t invest in controversial industries and could be something to think about for investors concerned about morally questionable companies.

Morals are subjective though – what seems immoral to one person might seem like a necessary evil to another. Take animal testing in the pharmaceuticals sector. Some think animal testing can't be justified under any circumstances. Others argue animal testing can lead to medical discoveries that save and improve human lives, and are therefore willing to make the trade.

As such, different funds approach exclusions-based investing in different ways. So it's important to check you fully understand how your fund manager is investing your money.

Investing to make a positive difference

For some, simply investing with an awareness of ESG issues, or avoiding the worst offenders isn't enough. They want to invest part of their portfolio in companies that have a positive effect on the environment and society.

Sustainability-focus funds do just that. They try to make money by investing in companies that are more sustainable than their competitors. Or that are likely to benefit from the growing need for more sustainable goods and services.

Impact funds go one step further. They measure and report back on the impact they set out to make on the environment and society. They might invest in companies that save a certain amount of water, or avoid producing a certain amount of carbon dioxide. That means they’re often more restricted on where they can invest than sustainable funds. But each investment has a direct, measurable impact.

It doesn’t have to be one or the other

Investors don’t have to think about these approaches in isolation. Some funds will incorporate one, two or even all three of them. What's important for investors is to be aware of the way your fund manager is investing your money, and make sure you’re happy that it represents your views.

For investors who want more information on the approaches we’ve talked about, our Guide to Responsible Investment does just that.

Our guide to responsible investing

This week is Good Money Week. It's a national campaign that aims to raise awareness of responsible investing. We think it could be a great time to make sure the people you trust to manage your money are doing so in a way that lines up with your views.

Throughout Good Money Week, you'll find a number of ideas for investors who want to try and grow their money in a way that reflects their views.

Read more: How to build a responsible investment portfolio

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