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Responsible investing – past, present and future

Responsible investing dates back to the 19th century, but a lot has changed since then, and so has responsible investing. Here's how it's evolved over the years and what the future could look like.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Responsible investing has come a long way.

It traces its roots back to the 19th century, when the Methodist Church in North America wanted to invest in the stock market while avoiding companies that made money from alcohol or gambling. Other religious organisations followed suit and avoided areas that went against their own values. These are some of the earliest examples of what we now know as exclusions-based investing.

Investors started to have more of a say on the way companies behave from the 1960s. Many avoided investing in South African companies during the era of apartheid, and this contributed to pressure on the government to end racial segregation.

From the 1980s, investors started to wake up to environmental concerns. These issues were brought into sharp focus in the wake of incidents like the Bhopal disaster – a gas leak at chemicals company Union Carbide, which caused thousands of deaths, and injured hundreds of thousands more.

The 2008 financial crisis was another turning point for responsible investing. It helped highlight the important role that investors play in making sure companies are held to account for their decisions and meet their obligations to all stakeholders.

What does responsible investing look like today?

Fast-forward to today, and the popularity of responsible investing has risen rapidly.

A raft of new responsible funds have launched to cater for investor demand, and lots of existing funds have been repurposed with new responsible objectives. They take a variety of approaches, which we broadly group as follows. Remember, these approaches aren't mutually exclusive, so several could apply to one fund.

  • Stewardship – fund managers practicing good stewardship normally see themselves as part-owners of the businesses they invest in. They want to make sure they're run in a way that benefits all shareholders. They vote at AGMs and engage with company managers to hold them to account, using their bargaining power to push positive change.
  • ESG integration – when analysing a company, a manager of an ESG integrated fund considers environmental, social and governance issues as part of their wider research. Managers of ESG funds think ESG factors play an important part in the long-term performance of a company.
  • Exclusions – funds that avoid companies that do harm to society like weapons manufacturers and tobacco companies. Exclusions-based funds are also known as negative screening and ethical funds.
  • Sustainability focus – these funds try to make money by investing in companies that are more sustainable than their competitors or are likely to benefit from the growing need for more sustainable goods and services.
  • Impact investing – these funds measure and report back on the positive impact they set out to make on the environment and society.

Even fund managers that don't place a specific emphasis on responsible investing have adopted elements of it.

For example, most mainstream fund managers now engage with the companies they invest in, and vote at their Annual General Meetings (AGMs) to bring about positive change. Most also incorporate ESG considerations into their investment processes, although some do so more comprehensively than others.

What's the future for responsible investing?

We think responsible investing will become more and more popular over the coming years.

Governments and companies alike are searching for ways to reduce carbon emissions and have less negative impact on the environment and society. Those left behind could face a media backlash, regulatory issues or even a customer boycott. Ultimately this will impact their prospects, and their share prices.

There's a demographic tailwind too. Millennials (those born between 1981 and 1996) are more interested in sustainability than any generation before them. As their wealth increases over time, they have the potential to reward sustainable companies, while punishing those that fall short of what's expected.

As demand for responsible funds continues to rise, fund groups will innovate to offer more solutions for investors, and more insight on the impact their funds have on the environment and society.

Responsible investing isn't without its issues though. It's an emerging field, which means there's lots of jargon. The framework for what constitutes a responsible fund is also still developing. That means investors must do the research to check the funds they invest in match their values.

It also makes it easier for unscrupulous fund managers to overstate the progress they've made developing their responsible approach, otherwise known as greenwashing. We expect future UK regulation to help solve this issue though.

What help is available for responsible investors?

If you want to learn more about responsible investing, see the new responsible investment section of our website.

It includes a variety of information to help you get started investing responsibly, from helpful tips and tricks to fund ideas.

Read more on responsible investing


Explore our Investment Times autumn 2021 edition for more articles like this.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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