For many investors, a strong return isn’t the only objective. Alongside investing towards achieving their objectives, they want to feel assured their money is being used to support causes and issues close to their heart, or steer clear of areas/sectors they have moral objections towards.
This approach is known as socially responsible investing. It can involve avoiding certain sectors, such as arms companies, or it could be focusing on companies who help to tackle environmental, social and governance issues (known as ESG).
Naturally this different approach can lead to a different investment journey. The reality is that some of the best-performing sectors and industries over recent years have been areas like tobacco.
Typically, a socially responsible investing fund would either deliberately steer clear of companies who produce such products – though they may at least focus on the best companies with best practice in certain sectors if their stated Ethical approach allows for this. In certain market conditions where these industries do well, this stance could mean you lose out compared to other, regular investment funds with no such restrictions.
However, over a full market cycle, that doesn’t necessarily mean you have to accept inferior performance. Socially responsible investing fund managers are still seeking to deliver strong returns for their investors; they’re just going about it differently.
How do socially responsible investing funds work?
As with regular investment funds, there’s a wide range of strategies and styles a socially responsible investing fund manager might take when constructing and maintaining a portfolio. There are also different approaches to screening.
Scott Ashworth, Senior Technical Research Adviser at Skipton, explained
Many funds will adopt a screening approach that means they deliberately screen out sectors and companies whose output is considered harmful to people, or to the world, in some way. Examples of this include gambling, firearms and fossil fuels.
Other funds might focus on investing into companies which make a positive social or environmental contribution to the world. This could include renewable energy, organic farming and recycling – or simply companies who operate in an ethical way.
There are some socially responsible investing funds who combine both approaches. They screen out certain areas of the market whilst also focusing on companies who provide solutions to ESG issues.
“It is important to carefully understand what a particular fund sets out to do in its screening,” continued Scott. “As these can vary quite widely, even towards the same sector, there is no universal approach to screening – and some funds will be stricter than others.”
The growth of socially responsible investing
In recent years we’ve seen a significant rise in demand for renewable energy that, if maintained, could have huge long-term benefits for investors. These and other socially responsible investing themes could continue to be more topical and relevant to the world we live in, leaving these funds well-positioned to benefit.
And it goes beyond socially responsible investing funds, as Scott concluded, “ESG issues have become more mainstream and forms part of company selection decisions by some conventional (non-screened) funds. After all, a company that isn’t managed well is less likely to prove to be a good investment.
“ESG matters are effectively another risk to take account of. For example, if a company’s environmental and social activity falls short of public – and authorities’ – expectations, it can significantly impact on its profitability. In some more drastic examples, it could even threaten the ongoing existence of the company.”
Finding out more
If you have strong feelings towards particular issues, we can offer you advice on whether your investment strategy could better reflect them.
To find out more about socially responsible investing and how we might be able to help, why not speak to a member of our team? Simply request a call back online or call us now on 0800 731 5342.
Please remember that stock market-based investments are not like bank and building society savings accounts as your capital is at risk and you may get back less than you invested. The value of your investments and any income from them may fall as well as rise.