Responsible investing incorporates both financial and non-financial factors so as to generate sustainable value for you as an investor. It consists of a set of investment approaches that considers not only the capital appreciation potential of a company, but also corporate practices, policies, and business activities that are in alignment with your values and principles. Responsible Investing can be broken down into 4 categories: Socially Responsible Investing (SRI); Environmental, Social and Governance (ESG) Integration; Impact Investing and Theme-Based Sustainable Investing.
Socially Responsible Investing
- Involves excluding investments in a portfolio based on themes or values.
- For example one might choose to exclude companies that produce harmful or addictive substances from their portfolios.
Environmental, Social and Governance Integration
- ESG Integration within an investment process is the inclusion of environmental, social and governance factors (i.e. climate change, employee health and safety, executive compensation) as a component of fundamental analysis within a portfolio in order to identify possible sources of excess returns or to reduce risk. The goal is to improve performance while limiting exposure to companies that don’t meet ESG standards. ESG approaches do not employ negative screens as SRI approaches do; managers will often engage portfolio holdings to elicit change of the company’s behavior on ESG issues.
- For example when screening a company we may find they have a poor environmental record compared to their competitors. This can potentially lead to lawsuits or fines that may damage the firm's reputation and profitability.
- By applying an ESG screen we are not necessarily avoiding any specific sectors within an economy.
- Impact investing specifically seeks to achieve a measurable social or environmental benefit, with the potential for a financial return. Impact investing goes beyond SRI or ESG factors as investors who have an interest in this area are looking to make a specific philanthropic impact with their investments.
- For example an investor will seek out investment opportunities where the business has a commitment to economic, social or environmental improvement in the regions they operate.
Theme-Based Sustainable Investing
- For the purpose of this classification, theme-based investing will typically focus only on investments that meet specific environmental criteria, but do not necessarily implement active screens based on pre-defined ethical standards or Environment, Social and Governance Integration.
- The primary examples of theme based investing include mandates that focus on sustainable resource management (water purification, renewable energy, environmental clean up technologies).