What is responsible investing and why does it matter?

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Personal Investing

05 October 2020

Investment Strategist, Sarah Peasey, reveals why she is passionate about responsible investing in today’s changing society.

Sarah, what is responsible investing and how does it link to environmental, social and governance (ESG) issues?

To be fair, responsible investing is a broad term. If you ask anyone what responsible investing is, they may struggle to answer.

Responsible investing is the umbrella, if you like, which sits above ESG factors. In our aim to be a responsible investor, we are broadening our focus away from only seeking a financial gain, and asking ourselves how can our investment decisions positively impact wider issues such as climate change, social inequality and gender diversity?

Environmental, social and governance factors are the lens through which we can assess these themes.

Can you give us some examples of ESG factors?

Sure. The ‘E’ refers to environmental factors, such as how we protect our planet. These could be the everyday problems affecting us all right now, such as climate change, deforestation and air pollution. The ‘S’ refers to things to do with society. In poorer countries especially, many don’t have access to a basic education, or even clean drinking water. Closer to home, social inequality may refer to the gender pay gap in firms which continues to impact so many employees. When we talk about ‘G’, this stands for governance. Governance typically involves balancing the interests of company management with those of their employees and suppliers.

If you think of this last point in terms of a pair of weighing scales, the aim is to make sure these are balanced in terms of fairness and equality. Getting that balance right is something we are even more committed to as we battle through this pandemic. 

What’s the difference between investing and responsible investing?

For me, it’s strange to think that, for years, companies only really thought about the owners of their businesses – the shareholders. Making a profit for shareholders was the number one priority. We believe the shift towards responsible investing has changed that.

Company managers are now actively being encouraged to ask, ‘How are we managing the welfare of our employees? Are we paying them enough relative to the job they carry out? Is what we produce negatively impacting the environment in terms of air and water pollution? How can we bring about positive change?’

Financially, does responsible investing make a difference to me as an investor?

Yes, we believe it does.

We typically find that investors want to ‘do good’ but they worry that this often comes at the expense of sacrificing financial returns. We don’t think this is the case.

We believe responsible investing has an important role to play in offsetting potential risks that could threaten future returns.

As well as offsetting risk, we feel there are opportunities to be had in the field of responsible investing. These include producing better products, improving how societies function and, ultimately offering sustainable long-term investment returns.

Is responsible investing here to stay?

Absolutely. Some have argued that the trend towards responsible investing is a short-term fad. We disagree. Our approach to responsible investing is shaped by that of our parent company, Legal & General, and its vision of inclusive capitalism. Inclusive capitalism, in its simplest form, is about seeking to share the benefits of economic prosperity among as many people as possible. An example of inclusive capitalism would be urban regeneration projects for the benefit of residents, communities and local businesses

Are more investors turning to ESG-related products?

In response to increased demand, we have launched a number of funds which aim to make a more targeted positive impact on the world in which we live. Take a look at our Future World Fund range.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.