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:
Morningstar provide a Sustainability Rating for funds. They are releasing a new Sustainability Rating on 31 October 2019 which will expand its scope to more than 50,000 funds worldwide. Milestone subscribes to Morningstar data and look forward to the release of the new Sustainability Rating.
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 fund managers that Milestone work with on a regular basis. www.harbourasset.co.nz/disclaimer