What is responsible investing?
And can investing responsibly help you “have your cake and eat it too”?
Increasingly we’re being asked about responsible investing. Sometimes called ethical investing, the interest in this area typically comes from two different generations of investors:
- Baby boomers. This group tend to be retired (or approaching retirement) and they remember the hippie era. Their focus is on leaving a better world for their children and grandchildren.
- Millennials. Who are in their late 20s and early 30s and are really starting to hit their economic stride – they are demanding a focus on ethics in all areas.
The combined interest from these two groups is really driving a responsible investing and ethics conversation across the whole investment industry.
Defining responsible investing
From an investment perspective, responsible investing covers a wide range of practices that broadly comprise a company’s environmental, social and governance footprint. When looking at companies through a responsible investing lens, you might include company behaviours such as carbon emissions, waste, leadership diversity, slavery and labour practices, executive remuneration and anti-competitive practices. You can also look at entire industries, such as tobacco.
Some investment managers will specifically screen out certain stocks in categories they have chosen to avoid (such as tobacco); this is often referred to as negative screening. Others go further and integrate environmental, social and governance research into investment processes so that investment portfolios can hold a larger portion of companies that exhibit good behaviours, and less of companies that don’t. The fund managers we work with all invest large sums of clients’ money which makes them relatively large shareholders in companies, and therefore they are in an effective position to lobby companies to influence improvements in their ethical practices.
What's the trade-off?
When we speak to investors, we often hear that people think there must be a trade-off between investment performance and ‘doing the right thing’. There is a growing body of research that shows that investing with a responsible focus helps, rather than hinders, investment returns. For example:
- It helps you avoid companies with excessive risks – avoiding companies who behave badly help you to avoid the risks those companies may face in the future. Bad ethical behaviour and poor governance by companies can be a red flag to signal future issues, which might negatively impact the company’s share value.
- Much research is now showing that companies with solid environmental, governance and social strategies deliver positive returns for investors over time. Focusing on companies who behave well can boost investment returns in the long term, especially as millennial consumers are increasingly rewarding brands that are seen to be ethical (meaning those companies have potentially better growth prospects than others).
It isn’t often that you come across a ‘have your cake and eat it too’ situation, but increasingly it seems that responsible investing is one of those unique areas. A true focus on the ethical behaviours of companies gives a far stronger picture of the long-term outcomes you might expect from a company and may both protect and boost your investment returns. And all of this on top of the feel-good factor you get from knowing you are investing in something you believe in.
This column is based on an article which was first published on the website of Harbour Asset Management, one of the many fund managers that Milestone Direct work with on a regular basis. www.harbourasset.co.nz/disclaimer