There is a strong possibility that right now, the money in your ISA or pension could be indirectly (or even directly) financing human rights abuses, environmental abuses, animal testing, weapons production. If you care about where and how your money is invested and whether this currently has a negative effect on the planet, Purposeful investing is definitely something for you.
This article is our attempt to decipher and un-complicate the jargon heavy world you will often encounter when researching how to put your money where your heart is, and explain what that actually looks like with Purposeful.Money in a Purposeful investment.
Numerous phrases have been used almost interchangeably in the financial press and by financial institutions and you may or may not have come across the following (in no particular order!):
‘ESG’ (‘Environmental, Social and Governance’)
Environmental, Social and Governance are the three main ‘headline’ factors that investors measure when deciding whether to invest in a company. They are viewed and analysed from the financial point of view (i.e ‘is this issue likely to have a negative impact on the value of my investment?’). You could almost argue that ESG investing is not led by an ethical concern, but that many issues which are important to an ethical investor are addressed by the process.
Environmental criteria consider the performance of a business in relation to issues such as waste and pollution, resource depletion, greenhouse gas emission, deforestation and climate change.
Social criteria consider employee relations and diversity, working conditions, local communities, health and safety and conflict
Governance criteria consider tax strategy, executive remuneration, donations and political lobbying, corruption and bribery and board diversity and structure.
‘SRI’ (Socially Responsible Investing/Investment): This is defined as any investment strategy which seeks to consider both financial return and ‘social good’, to bring about social change. As usual, there is plenty of room for interpretation here (which has led to another phenomenon which we explain in this article, called ‘green washing’), and has been used seemingly interchangeably with ‘ethical investing’ and ‘sustainable investing’ in recent years.
‘Impact Investing’: This is a slightly clearer investment strategy, in as much as it will focus on profiting from solving a societal/environmental problem, as opposed to ignoring it and simply profiting from ‘non-damaging’ areas of the market. A good example would be an investment in one of the various ‘clean energy’ sectors such as solar or wind, where invested money is not only avoiding funding damaging areas of the market, it is helping speed up a more general move towards ‘better’ business by helping development, market share, awareness etc. Some funds are genuinely ‘Impact’, but they are still currently in the minority. Part of Purposeful. Money’s broader aim is to support Impact investing and help it become more widespread. Where possible and justifiable, we include Impact funds as a matter of preference in our portfolios over other holdings.
Positive/Negative Screening: These are strategies applied by Socially Responsible fund managers (and other investors) where certain types of investment will be specifically excluded or included during the selection process, An example of negative screening (probably the more common approach of the two, currently) would be a fund stating that in order to show it is making an effort to invest ‘ethically’ or ‘sustainably’ it will exclude all investments in tobacco or fossil fuels. Positive screening on the other hand is very similar to the ‘Impact’ approach, and looks to include investments which can be argued to be making a positive difference to the world in general (not just financially for its shareholders). Again, ‘clean energy’ would be a good, simple example of such a ‘Positive Screening approach.
Greenwashing: ‘Sustainable’, ‘ethical’, ‘socially responsible’ investing has been experiencing a rapid increase in interest from consumers, looking to ‘do the right thing’ in recent years. Unfortunately, this has led to some funds and businesses labelling themselves as ‘ethical’, ‘sustainable’ etc without doing much in reality to back this up. The ‘ACME Ethical Fund’ may have some lovely glossy marketing and advertising making it appealing to well meaning investors, and may in its small print allow discretion for the manager to hold stocks and shares in companies and sectors that would almost certainly go against the values of its potential new customers. This practice adds needless complexity to the industry and unfortunately (but understandably) tars all funds with the same brush. We identify and screen out any fund or investment where greenwashing is apparent, through our investment process.
Bottom up and top down: Dealing less specifically with the world of investments and pensions, nevertheless these phrases are relevant and quite common, particularly in the press. ‘Bottom up’ pressure describes the consumer/general public looking to invest more in businesses which display ‘ethical’ values than was previously the case. As information is more quickly and easily available, and easier to check for veracity, demand for ‘non-damaging’ investments is growing. Activist groups such as Greenpeace and Avaaz, and huge new mediums for finding and sharing information such as Twitter and Facebook are driving much of this bottom up pressure. ‘Top down’ pressure is beginning to make itself felt as governments and global institutions become aware of the very limited lifespan of ‘business as usual’ and agree to implement laws and regulations which punish damaging business practices and encourage sustainability. An example of this is the scientific consensus on global warming which led to the agreements put in place at the Paris Climate Talks (COP21).
Stakeholder: Traditionally, businesses have existed for the benefit of their shareholders, and the conversation about whether or not a company has been successful has always been from this point of view and in relation to specific financial profit or loss for the shareholder. A ‘stakeholder’, by comparison is anyone or anything which is impacted by the actions of the company, not just those people with a personal financial investment. For example… In the UK, the taxpayer could be said to be a stakeholder of the tobacco industry, as the NHS covers the cost of treating people who have become ill as a result of smoking, or being exposed to smoke. The tobacco companies do not cover this cost, it does not make its presence felt on the balance sheet. Customers, employees, the government, the environment, and local communities could all be described as stakeholders of businesses. We look to invest in companies which consider their impact on their stakeholders, not just their shareholders.
Contact us today for a no obligation, no cost discussion about your pension or investment, or if you have any ideas or suggestions as to how we could improve our business.
Give money more purpose.