An increasing number of investors are now looking to invest sustainably. With multiple sustainable investment strategies it’s not always easy to immediately distinguish the differences between them. It is up to the investor to choose the approach that best suits their financial and sustainability goals, so we have compiled some information on common sustainable investing strategies to assist investors with understanding their choices.
ESG (environmental, social and governance) integration
ESG integration is a general approach to investing that incorporates environmental, social and governance (ESG) considerations alongside traditional financial analysis.
– Broadly speaking, environmental factors include issues such as climate change, deforestation, biodiversity and waste management.
– Social factors include issues such as labour standards, nutrition and health and safety.
– Governance includes issues such as company strategy, remuneration policies and board independence or diversity.
ESG integration is about understanding the most significant ESG factors that an investment is exposed to and making sure that you’re compensated for any associated risk.
Although sustainable investing involves ESG integration, it takes things further by focusing on the most sustainable companies that lead their sector when it comes to ESG practices.
Both the ESG integration and sustainable investing approaches are about engaging with company management to make sure the firm is being run in the best possible way. This can mean challenging a company on its sustainability practices to encourage improvements where necessary.
Screening is when you decide to invest, or not to invest, based on specific criteria.
Let’s say you only want to invest in companies that promote workplace diversity. Your criteria might be substantial representation of women and minorities in management level positions, and/or the existence of diversity and inclusion policies.
You (or your fund manager) will use these factors to deliberately exclude investments that don’t meet these criteria (negative screening). Or they might purposefully include those that do (positive screening).
Ethical investing is an example of where screening is commonly used. Investors screen out investments that they deem unethical because they don’t fit in with their ethics or values (it’s also called values-based investing).
People commonly exclude so-called “sin stocks” such as alcohol, gambling, weapons manufacturing, tobacco or adult entertainment companies because they view these activities as immoral.
Impact investing is about putting your money to work in a way that has a specific, measurable and positive benefit to society or the environment.
This isn’t to be confused with a charitable donation though. You also want to generate a return on your investment, as well as promote social good.
Let’s say you’re passionate about education in Africa. You can put your money into a fund that invests in companies or projects that are working towards delivering quality education in African communities. Or you can invest directly in these companies or projects yourself.
Impact investing is more common in private markets (i.e. not the stock market). Recipients tend to be small companies with clear social goals that otherwise may not have access to capital.
This is about investing according to your chosen investment theme. Maybe your theme is ‘health and wellness’. In this case you’ll only want to consider funds that invest in healthy food brands or those companies focused on developing new vaccines.
Or perhaps your theme is ‘green investing’. If so, you’ll only invest in companies and technologies that you consider good for the environment (alternative energy generators or energy saving technology manufacturers, for example).
The above is not an exhaustive list of the sustainable strategies available out there. But it should serve as a good starting point to help you understand the differences between some of the common approaches.
For more information please speak with your LT financial adviser. Alternatively should you need a financial adviser please contact the LT team on (02) 4926 2300 or visit our contact us page.
Opinions, estimates and projections in this article constitute the current judgement of the author(s) as at the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 (‘Schroders’) or any member of the Schroders Group and are subject to change without notice. In preparing this article, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us.
Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person.
This article does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the relevant disclosure document for that fund to consider the appropriateness of the fund to your objectives, financial situation and needs.
You should note that past performance is not a reliable indicator of future performance.
Schroders may record and monitor telephone calls for security, training and compliance purposes.