Performance With Integrity
Investing responsibly is an area that is quickly growing traction. The philosophy behind it is based on evaluating the impact of a company’s actions, products, and leaders, and actively engaging with companies to drive change.
The move to bring investment choices closer in line with investors’ own personal values is something that different investors have different levels of interest in. Up until fairly recently, the established thinking was that the more responsibly you invested, the more your overall returns would be negatively impacted. These days we better understand that values and profits are not mutually exclusive, and comparable gains can be achieved through responsible investing.
Values-based investing strives for a healthier balance between generating profits and encouraging positive outcomes for the environment and society in general. It is commonly referred to as ESG (environment, social, and governance). It also includes recognizing companies that engage in fair labor practices and promote inclusion in the C-suite.
There are many ways to invest responsibly, but we believe ESG integration and engagement are of central importance.
As part of our research process, before deciding on a company to invest in, we study its ESG dynamics as being both potential rewards and also risks in addition to the typical financial benchmarks. ESG considerations are part of our core decision-making process as it is the right thing to do and simply makes for smarter investing. Companies that are making strides to do better when it comes to ESG also have a tendency to be rewarded.
Companies with highly ethical approaches to their business also tend to be embroiled in fewer scandals and issues that can negatively affect the company’s performance. When all factors have been taken into account, assessing a company based on ESG is still a balancing act and does not always determine the decision to invest or not.
By using our investment power, we are able, to some degree, to influence company directors and executives and encourage better ESG behavior. Raising ESG issues directly with the senior management of these companies is also in our own interest as companies with weak ESG behaviors are prone to more volatility. There are several ways to develop responsible investment portfolios:
- Vetting: evaluates and assesses companies against an investor’s specified values and world standards. Common exclusions include gambling, tobacco, armaments, and nuclear energy.
- Thematic investing employs a top-down approach to invest in companies orientated more towards sustainability in a segregated portfolio. Such companies may be involved in activities that positively contribute to environmental protection or the betterment of society.
- Impact investing is made into companies and organizations which produce a measurable, beneficial social or environmental impact in addition to a healthy financial return.
Portfolios comprising responsible investments at their core can take advantage of one or more of these approaches, and we build portfolios that cater to responsible investing from different positions, offering investors diversification by approach as well as by geographical location.
Can I Still Make Good Returns?
The claim that responsible investing causes a reduction in reward is a long-standing idea in the investment world. Recent information points to it no longer being the case. As more and more companies move towards more responsible activities, there is a broader selection of investments to choose from. The argument that both society and investors’ profit more from responsible investing is gaining ground, provided it is sensibly implemented and founded on thorough research.
As an example, research has shown that improvement in ESG ratings can be an indicator of future company outperformance. The returns for companies with ESG rating upgrades from over ten years were analyzed by MSCI (Morgan Stanley Capital International), and on average, shares with ESG upgrades outperformed the S&P 500 over the following year, while stocks without upgrades fell behind.
Vetting also requires the careful weighing up of reward, risk, and responsibility. Analysis indicates that enforcing the strict exclusion of any involvement in the most common business areas that responsible investors try to avoid can diminish returns and intensify volatility.
How To Gauge Responsibility
Responsible investments are intended for investors who look to social or environmental outcomes as much as profit, but how is that gauged?
Industry benchmarks for determining responsibility are still being written, but as investors increase their interest in ESG issues, voluntary disclosures by companies are becoming more common. In time, this improvement will provide us with better metrics to quantify and measure responsibility.
Performance With Integrity
Our global outlook, in-depth industry expertise, and thorough research practices enable us to combine the differing requirements of clients who view ESG as a priority. We don’t see responsible investing as a hindrance to performance, as both factors complement each other and can promote the furtherance of social and environmental issues – pushing companies to do better.