What is sustainable investing and is it the same as responsible investing?

The terms ‘responsible investing’ and ‘sustainable investing’ are often used as a catch-all to describe investments made with social, environmental, or other responsible or sustainability criteria in mind.

The terms are interchangeable and are used alongside others, including:

• Community investing

• ESG investing

• Ethical investing

• Exclusion-based investing

• Green investing

• Impact investing

• Mission-related investing

• Shareholder action

• Socially responsible investing

• Thematic investing

• Values-based investing

Confused? You’re not alone. Whatever terms you use, investing in this way means different things to different people, depending on your principles, values and beliefs.

In essence, it describes the practice of an investor using their money to make a positive contribution to society or the environment.

Investors increasingly want their investments to reflect their views on environmental and social issues (while still generating a positive return). According to UBS Group, the majority of global investors (65%) believe in helping to create a better planet and state that these values influence their spending decisions, lifestyle habits and even career choices.

In recent years, numerous investment funds have been created to cater for the demand, but the challenge is that each responsible investment fund does something slightly different.

This, coupled with the myriad terms used to describe this type of investing, makes it tough for investors to work out what each one is doing, and whether it's in line with their own values.

The Investment Association (IA) Responsible Investment Framework

The IA has created a set of definitions to describe and categorise the different ways we can invest responsibly.

The categories are outlined below. They are not mutually exclusive, meaning more than one could apply to a particular fund.

1. ESG Integration - The inclusion of material environmental, social, and corporate governance (ESG) factors into investment analysis and investment decisions. ESG integration alone does not prohibit any investments, for example, investments within the oil industry may be allowed. Such strategies could invest in any business, sector or geography as long as the ESG risks of such investments are identified and taken into account.

2. Exclusions – This involves the explicit exclusion of certain investments. Exclusions may be applied on a variety of issues and at sector, business, company or geographical level. Examples include investments with exclusions made on the basis of:

   • Ethical, values-based or religious criteria, for example, gambling, alcohol, or pork.

   • Not complying with international standards of conduct, for example, the UN Human Rights Declaration.

   • Sustainability considerations, for example, fossil fuel companies.

3. Impact Investing – Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Examples include:

   • Social bond funds - Funds that invests in bonds, whose funding is ring-fenced for projects or initiatives that have the intention to generate a positive social and environmental impact.

   • SDG impact funds - Funds where impact is measured with respect to the UN Sustainable Development Goals (SDGs).

4. Stewardship – This is the responsible allocation, management and oversight of capital within companies to create long-term value leading to sustainable benefits for the economy, the environment, and society. This includes exercising rights and responsibilities such as voting at AGMs, and escalating concerns to hold companies to account on their business activities.

5. Sustainability Focus – This involves the inclusion of investments on the basis of their fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcomes. Investments are chosen on the basis of their economic activities (what they produce and what services they deliver) and on their business conduct (how they deliver their products and services). Examples include investments that:

• Aim to address climate change mitigation, pollution prevention, and sustainability solutions.

• Aim to address one or more of the UN Sustainable Development Goals (SDGs).

• Include the best performing companies, for example the lowest carbon / most energy efficient producers.

• Exclude the worst performing companies, for example the highest carbon / least energy efficient producers.

Interested in sustainable investing?

If you would like to learn more about what responsible or sustainable investing is all about and to find out what options are available get in touch and we will be happy to help. An initial chat is on us.

This article offers information about investing and should not be taken as personal advice. Remember, the value of investments can rise and fall and you may get back less than you put in.