How To Be A Responsible Investor

Responsible investing has become a front-page issue in the last year as companies, investors and asset managers have had to respond to a number of ethical and governance lapses that have made the news. Raine Naudé discusses the different approaches to responsible investing and explains how we incorporate an assessment of environmental, social and governance concerns into our investment process.

It has become common for terms like “sustainable investing”, “socially responsible investing (SRI)” and “environmental, social and governance (ESG) integration” to be used interchangeably; however, there are important differences between them. For the purposes of this article we use “responsible investing” broadly, meaning that an investor invests responsibly by taking one or more investment approaches, including ESG integration and SRI. These different approaches enable investors to find the responsible investment strategy that works best for them.

Screening: not black and white
Investment managers sometimes offer funds that screen out or exclude certain shares or include others. For example, SRI funds use negative screening to exclude companies or sectors based on ESG and ethical criteria. Common historical exclusions from these SRI funds include “sin” stocks such as tobacco, alcohol, gambling and weapons. Increasingly, companies that produce or use large amounts of fossil fuel are excluded due to their environmental impact.

Depending on the lens applied by the company, the same ESG principles are often applied esoterically, giving different exclusion or inclusion lists. For example, Parnassus Investments and Domini Impact Investments are two US companies specialising in responsible investing. The Parnassus Core Equity Fund, one of the largest SRI funds in the US, historically has excluded Coca-Cola because it sells unhealthy products. On the other hand, Domini’s Impact Equity Fund invests in Coca-Cola as it met its “investment impact standards” through strong charity initiatives and activities in the development of minorities and communities.

All companies may have both positive and negative impacts on the environment and/or society. These can be complex to weigh up: what happens if a company has a positive social impact, but is damaging to the environment? Furthermore, different social and environmental concerns resonate with different people. A survey of a diverse group of people will be likely to draw a broad range of companies and sectors and plenty of disagreement on what is excluded. We have a responsibility to act in the best interests of all clients, which makes maintaining a universally acceptable exclusion list difficult – especially within the confines of the JSE.

Read the full article: https://www.allangray.co.za/latest-insights/investment-insights/how-to-be-a-responsible-investor/ 

June 04 2018 By Raine Naudé - Allan Gray Investment Team Financial Planning, Investing & Markets