In an ideal world, many of us would choose to do good with our money if we could also meet our financial objectives at the same time.
Historically, it was thought that money and morals don’t necessarily mix. However, financial institutions like banks, insurance companies, and fund managers, play a pivotal role alongside Government regulations to successfully combine these two interests.
When it comes to making responsible investment decisions, be it your pension, ISA, or another type of account, a number of important considerations are needed to ensure they both remain suitable for your future goals and also reflect your preferences around sustainability.
There are different ways of approaching this, with a whole spectrum of investments. These are not mutually exclusive, but it’s helpful to identify which approach best resonates with you. The spectrum of capitals is a fantastic way of showing how different responsible investment approaches, and their financial goals, alight with the impact they make on people and the planet.
Responsible investment approaches:
An ethical exclusions fund manager seeks to avoid industries and company practices that cause harm to people or the planet. People have been excluding companies on ethical grounds for centuries.
Example: Exclusion of companies making tobacco products, manufacturing armaments, or producing or distributing fossil fuels.
A responsible practices fund manager considers the operational practices of investee companies and supports ‘best practice’ and the use of engagement to encourage companies to improve their environmental and social performance.
Example: Investment in a retailer which requires suppliers to treat their employees well and seeks to reduce the environmental impact of its operations.
A sustainable solutions fund manager seeks to invest in companies that are providing solutions to social and environmental challenges through their core products and services in the belief that this will realise long-term financial benefits.
Environmental Example: Investment in a company that makes a product that improves energy efficiency by 30%.
Social Example: Invest in those directed at reducing inequalities, providing job security and opportunities for advancement by employees.
An impact fund will have clear intent to make a wider positive social or environmental impact. The fund will be substantiated by investment in companies providing solutions to social and environmental challenges through their core products and services, with evidence provided of the social and environmental impact.
Example: A fund investing in companies addressing healthcare needs, generating renewable energy, improving energy efficiency; and that reports on its impacts in terms of patients cared for, clean energy generated, and resources saved.
A key element of impact investing is a formal process to measure and monitor investments. It’s important to assess whether they are on track to achieve their environmental and social goals.
Although investors may show a preference for solutions that consider sustainability, there are trade-offs to be made that can restrict the number of potential investments and the ability to diversify a portfolio. It is therefore important to understand these financial considerations in relation to sustainability preferences.
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