Below we give an overview of types of responsible investment (RI) and also dispel the myth that you will get lower returns if you invest responsibly.
1. Responsible Investment Categories
RI incorporates environmental, social and governance (ESG) factors into investment decisions to better manage risk and generate sustainable, long-term returns (source: UNPRI website). RI strategies have moved beyond "exclusions" or "negative screening" (avoiding companies with revenue from sources like tobacco). Other RI strategies can select companies using more positive approaches:
“Sustainable theme” investing is investing in ideas making the planet a better place. These include clean energy and water treatment.
“Norms-based” investing is guided by international treaties on what is acceptable, an approach adopted by the NZ Super Fund. For example norms based investing excludes cluster munitions manufacturers (NZ is one of over 100 countries that have joined the UN’s Convention on Cluster Munitions).
“Engagement” is not excluding companies but rather voting, engaging and lobbying as a shareholder for change.
“Impact investing” is relatively new and focused on generating social or environmental benefits as well as a financial return. Impact investing is generally very targeted, such as providing affordable housing or healthcare in a specific area. This means social outcomes can be clearly measured.
"ESG integration" reviews companies on environmental, social and governance (ESG) factors and integrates this into investment decisions. This can involve reviewing workplace accidents, environmental incidents, governance effectiveness, tax transparency and product recalls.
Below sets out which RI strategies apply to Pathfinder's Funds (remember that RI = Responsible Investment):
2. Dispelling RI return myths
Next we turn to returns. For research by Pathfinder explaining why RI returns should be at least as good as wider market returns click here (from September 2017) and here (from April 2017). We strive to make our research both robust and readable, and include practical examples. We encourage you to read our views on why investing responsibly will not cost you compared to "conventional" investing.