Beginners guide to responsible investing

Did you know that your money gives you a say in influencing companies on important issues, such as how they consider Climate Change?

You might be thinking that sounds a little too good to be true.

But it isn’t.

When you invest, particularly in funds, you can feel removed from where your money ends up. You might have a rough or even a good idea of what you’re investing in, but it’s really easy to forget that your money is put into actual companies.

Which means your money funds the outputs and outcomes of those companies.

Here’s how your money can make a difference by integrating sustainable practices into the development of business strategies. 

But first, the fine print. 

This article can give helpful tips, but it isn’t personal advice. 

When you invest, there’s a risk that you could get back less than you put in. That’s because investments can fall as well as rise. If you’re unsure if investing is right, you can speak to an independent financial adviser.

Where does your money go when it’s invested?

There are many different ways to invest. Some of the most common ones are bonds and shares.

Investing in bonds means you lend money to a company (or even the government – government bonds are sometimes called ‘Gilts’) for a particular time. As a ‘thanks for lending us money’, investors receive interest payments and the return of the money initially loaned at the end of an agreed period.

When you invest in shares, either in individual companies or funds, you buy tiny pieces of companies.

It might be small, but it can be mighty because you become a shareholder.

Shareholders are important, as they can vote on essential aspects of the business.

These include a company’s climate change policy (environmental factors) or the composition of the board of directors (governance factors). Larger shareholders do have more influence, but that doesn’t mean that smaller shareholders can’t make a difference.

So, remember that when you own parts of companies, your money enables those companies to make decisions.

Holding company bonds and shares and voting allows investors to help encourage and promote good behaviours. This happens by engaging with companies to enable them to make positive changes. Additionally, the services provided by these companies can promote sustainability and drive innovation, addressing specific industry challenges and contributing to the global landscape.

But why’s it important?

Most importantly, it can benefit people and the planet. It can also lead to better long-term financial performance for companies and their investors!

What is responsible investing?

Responsible Investing is a way to use money to make a profit while considering people and the planet.

When you invest in a fully or even partially responsible fund, the fund managers decide where to invest your money. They look at certain factors, which we call the three P’s, but you might find others calling them ESG. That stands for Environment, Social and Governance (more on this later).

1. People: This is about how companies treat their staff. They’ll examine how their suppliers treat their staff fairly and whether they consider the organisation’s impact in the broader community. For example, more responsible companies will have clear standards for staff treatment and fair wages.
2. Planet: This looks at how companies use their resources, and whether they affect the environment, and whether the waste they produce has an impact on the planet. This is where you’ll often hear about companies setting Net Zero carbon emission goals. For example, more responsible companies will have plans to shift towards reducing carbon emissions, minimising waste, and meeting standards to protect nature.
3. Profit: This looks at how companies are being run from a financial point of view and whether they consider their stakeholders when making decisions that could impact their business. If stakeholders are being listened to, it can show that companies are more considerate about how they make money. Those decisions can also have an impact on the other two P’s. They all fit together nicely.

Why is responsible investing important?

The world is changing. There’s no doubt about it.

There aren’t infinite resources on earth, and we might find that, in time, those resources run out. That can hugely affect the economy and cause lots of market disruption.

Let’s look at an example.

Oil and gas are always prominent sectors in the market.

Fossil fuels contribute to climate change, and if we don’t make changes soon, we’ll likely see more natural disasters and pollution that affect everyday life.

With such a large industry taking up so much of the market, it’s not difficult to see how these companies could be impacted if they didn’t make necessary changes towards reducing their climate impacts and how the markets can also be affected.

How can investing responsibly make a difference?

When you invest, you make meaningful decisions with your money, which could contribute to a brighter future.

Here are some of the ways that can happen:

Investing responsibly can motivate companies to improve. It’s about having a voice and using it to ensure companies follow the three Ps. Fund managers and the financial industry can talk to companies to help ensure this. This is more commonly known as active ownership.

Some fund managers can set favourable tilts based on the three P’s and ensure that the companies your money is invested in are working towards a better future. They might still choose companies in sectors that can seem ‘controversial’, like oil and gas, but they’ll ensure those companies are committed to improving in the future.

Other fund managers use ‘exclusions’ to weed out companies with bad outcomes regarding the three Ps. For example, they might eliminate an entire sector, such as weapons manufacturers or tobacco companies, because they don’t think those companies can possibly hit the three Ps targets in the future.

Understanding ESG factors and investing strategies

ESG Factors

ESG (Environmental, Social, and Governance) factors are criteria used to evaluate a company’s sustainability and social responsibility. These factors are increasingly important for investors, as they can significantly impact a company’s long-term financial performance. The three main categories of ESG factors are:

• Environmental factors: This includes a company’s environmental impact, such as its carbon footprint, water usage, and waste management practices. Companies that prioritise environmental sustainability are often better prepared for the future as they work to minimise their negative impact on the planet.
• Social factors: This includes a company’s relationships with its employees, customers, and the wider community, as well as its human rights record and labour practices. Companies that treat their employees well and engage positively with their communities will likely have a more loyal workforce and customer base.
• Governance factors: This includes a company’s leadership, management structure, and corporate governance practices, such as board composition and executive compensation. Strong governance practices ensure that a company is managed transparently and ethically, which can reduce risks and improve long-term performance.

Responsible investing strategies for beginners

Investing in ESG-focused companies can be a great way to align your investments with your values and potentially generate long-term returns.

Here are some investing strategies for beginners:

• Start by researching ESG-focused companies: Look for companies with a strong sustainability and social responsibility track record. This can involve reading sustainability reports, checking ESG ratings, and staying informed about industry news.
• Consider ESG-themed ETFs or mutual funds: These investment products allow you to diversify your portfolio and gain exposure to a range of ESG-focused companies. They are managed by professionals who select companies based on their ESG performance, making investing responsibly easier.
• Look for companies with strong governance practices. These companies are more likely to be transparent and accountable, which can reduce the risk of investing in them. Consider factors like board diversity, executive compensation, and shareholder rights.

Measuring and reporting ESG performance

Measuring and reporting ESG performance is important in evaluating a company’s sustainability and social responsibility. Here are some key metrics to look for:

• Carbon footprint: This measures a company’s greenhouse gas emissions and can be used to evaluate its environmental impact. Companies with lower carbon footprints are generally more environmentally responsible and better positioned for a sustainable future.
• Diversity and inclusion: Metrics can be used to evaluate a company’s relationships with its employees and the wider community. Companies prioritising diversity and inclusion will likely have a more innovative and engaged workforce.
• Governance metrics: These metrics can be used to evaluate a company’s leadership and management structure. Strong governance practices, such as having a diverse and independent board, can enhance a company’s accountability and decision-making processes.

Companies can report their ESG performance using a range of frameworks and standards, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). These frameworks provide a standardised way for companies to report their ESG performance and can help investors make informed decisions. By using these frameworks, companies can demonstrate their commitment to sustainability and social responsibility, making it easier for investors to identify responsible investment opportunities.

Investing responsibly for long-term sustainability

So, now you know what it’s all about, investing responsibly doesn’t have to be complicated.

One of the easiest ways to make your money more meaningful is to invest in funds that match your personal views or that are committed to improving the planet.

Investing in clean energy or sustainable funds means that your money is being invested by experts worldwide to help it grow and spread risk. It also considers the influence your investments can have on people and the planet.

These responsible companies are more likely to be well managed, amongst the best placed for future growth, and contribute to moving to a sustainable low carbon economy.