A Guide to
Socially Responsible Investing
Making an Impact with your Investments
As concerns about climate change and the environment become more prevalent many people are
starting to consider their own personal impact. Whilst many make changes to their everyday lives
to lessen their environmental footprint have you thought about the impact of your savings and
investments?
If you would like to align your investment choices with your social and environmental values then
Socially Responsible Investment (SRI) may be for you.
Socially Responsible Investment is a term used to describe investments which take into consideration
social and environmental factors as part of the investment decision making process.
In this guide we will explore how this area of investment is evolving, why it is becoming more
important and explain some of the key terminology.
Contents
Investment screening
The Evolution of Socially Responsible Investment
Shades of Green - How Ethical is my Investment
Investing in a changing world
The United Nations Sustainable Development Goals
The changing face of business
Environmental, Social and Governance factors (ESG)
Positive Impact
Thematic investing
Is Socially Responsible Investment for me?
Jargon buster
Frequently asked questions.
2
Investment Screening
Historically, ethical investing has been
about excluding stocks or sectors of
the market perceived to be unethical
such as alcohol, tobacco, gambling,
defence or armaments. This
exclusionary method has in the past Positive screens seek
led to underperformance versus the Negative screens
to invest in companies exclude companies /
wider market when excluded areas
outperformed. which provide positive sectors based on certain
contributions to society measures.
In more recent times the market has evolved to
focus more on positive screening. As focus on & the environment.
climate change and environmental and social
For example tobacco
For example companies stocks, companies
issues have come to the fore and Governments
have signed up to initiatives such as the Paris which provide clean involved in animal
Climate Agreement and the United Nations energy or social housing. testing, companies with
Sustainable Development Goals many a negative environmental
companies are becoming more focused on impact.
aligning themselves with these goals.
1971 - The 1984 - Saw
PAX Fund was the launch of End of
Socially Responsible Investing can launched in the first ethical the 90’s -
be traced back to religious orders the US inspired fund in the UK approximately
such as the Quakers and Methodists by anti-war - The Friends £3.3 billion
who originally wanted to exclude activists during Provident invested in 50
‘Sin stocks’ such as alcohol, tobacco the Vietnam Stewardship ethical funds.
and gambling. War. Fund
The Evolution of Socially Responsible Investment
Over time this developed 1983 - Increasing availability Increased
to include a wider range EIRIS(Ethical of news started to newsflow, aided
of sectors such as arms Investment highlight to people by increasing use
and this exclusionary Research Services) the environmental of social media
method ‘Negative was established impact of things such brought issues to
screening’ became as the UK’s first as deforestation and people’s attention
popular with Charities independent Human Rights abuse and ethical
as well as individual research for ethical by companies within consumerism
investors. investors. the supply chain. grew.
3
Shades of Green – How Ethical is My Investment?
Funds can be classified using shades of green to help investors
identify how strict the criteria are likely to be.
Light green funds
These will normally have a more relaxed investment criteria.
Dark green funds Investment universe
significantly reduced
These take into account a wide range of ethical concerns and have
strict standard, for implementation.
Investment universe becomes
Whilst this seems a relatively simple method for classification
more constrained
finding funds to meet all of an investors criteria can be
tricky. It should also be considered the more areas
an investor wants to screen out the smaller the
investment universe becomes. Large investment universe available
In October
2017, David
On 1 January Attenborough European
2016 the bought Parliament
The Paris Climate Agreement Sustainable banned single-
attention to
(COP 21) really brought climate Development use plastic
the plastic
change and carbon emissions to the Goals (SDGs) including
problem in
forefront and environmental issues officially came straws in
the ocean in
are becoming a central issue for into force March 2019
Blue Planet II
many companies and investors.
By the end The
2017 report
of 2015 import of
of the Task
EIRIS stats over 24
Force on
showed the types of
Climate-
UK ethical waste was
related
fund market banned in
Financial
size was China in
Disclosures
£13bn and January
(TCDF)
growing. 2018.
4
Investing in a Changing World
The World is changing rapidly; an increasing global population is placing new demands on
healthcare, infrastructure and agricultural systems and climate change has become a key concern.
In 2015 the UN held a global summit it Paris where all but Electric vehicles – the market is developing and the petrol
two countries signed up to reduce their carbon emissions to and diesel cars we have been so used to are gradually falling
help tackle climate change. The impact of this is now feeding from favour as people move to EV’s to reduce their carbon
through to businesses as Governments look to align their impact.
economies to reduce CO2 output and meet these targets in
the face of growing public pressure. Cyber-crime – as the world has moved online this has
opened up new challenges and cyber security is increasingly
These are creating structural changes within society and important.
the economy and new products and services are being
developed to address the issues the world is now facing, in Healthy Living – people are becoming more aware of the
turn this is changing the investment landscape and providing benefits of living healthily, this is extending beyond dropping
new opportunities. habits such as smoking and companies are now looking to
develop cost effective natural foods to combat health issues
For instance: such as obesity and diabetes.
Renewable Energy – Companies producing efficient and
environmentally friendly energy alternatives.
5
The United Nations Sustainable
Development Goals
The United Nations Sustainable development goals were launched in 2015 and comprise 17 global
‘goals’ which target key objectives for economic, social and environmental development.
The SDG’s aim to create a model for long term economic Many Socially Responsible investments look to align
growth achieved without compromising the environment or themselves with these goals and look to explain how the
placing unfair burdens on societies. companies they invest in contribute to these goals, through
regular reporting.
JARGON BUSTER
If you would like to gain a better understanding
of some of the terms and vocabulary used
within this guide, check out the jargon buster
on page 12.
6
The changing face of business
The way many businesses now operate is also changing, Global awareness of issues such as gender inequality in the
increased global news coverage and use of social media work place is making companies reassess how employees are
highlights business practices that many find unacceptable treated and remunerated.
and companies are making changes to address this.
Many large shareholders are now committed to ‘engaging’
These practices cover a wide range of areas including how for positive change. They can use their influence to push the
the business interacts with all stakeholders, employees, company to make changes to working practices and use their
customers and the communities in which they operate as well voting rights at company AGMS in order to influence policies
as the environment. moving forward. This is also known as ‘investor stewardship’
or ‘shareholder activism.’ In extreme cases if the company
High profile examples in recent year of environmental disasters refuses to make changes and the shareholder feels no more
at oil companies and mining companies or governance issues can be done they may divest their holding.
at major banks have impacted on the company not just
through significant fines and court costs but deterioration
in trust in well-known brands which has impacted on the
company earnings and share price.
7
Environmental, Social and Governance issues - ESG
ESG is an increasing popular phrase within investment and Companies which have strong policies in these areas and
can mean different things to people. At its most basic level it look after the environment and stakeholders are favoured
is a company’s policy in the areas of by Responsible investors. Whilst a company can score very
highly on ESG issues it does not mean it will suit all investors
Environment – the natural environment in which it operates as it may still provide a product or service they do not wish
and the impact its operations have on this environment to invest in e.g a tobacco company can have excellent
including the company’s carbon footprint. governance and social policies but for many the end product
is still undesirable.
Social – this criteria examines how it manages its relationships
with employees, suppliers, customer and the communities
within which is operates
Governance – how the company’s leadership operates and
behaves and ‘governs’ the company, it looks at executive pay,
audits, internal controls and shareholders rights.
8
Positive Impact
As the area of SRI investing has developed the focus has moved from just screening out areas
where people don’t want to invest to focussing on investments which aim is to provide capital
to address the world’s biggest challenges (as per the UN SDG’s) which in the past have been the
domain of philanthropists.
In its purest form impact investing should be with the intention Although this ‘positive impact’ is not necessarily quantifiable.
to generate positive measurable social and or environmental Whilst this is very helpful for investors to understand where
impact as well as a positive financial return. they are invested it is not always quantifiable.
Whilst it is easy to quantify financial return measuring social and
environmental impact can be very difficult as there are many
variables. A popular example of measuring environmental
impact is to look at the CO2 footprint of a company or fund.
Many funds now produce annual impact reports which gives
examples of the positive ways in which money is being invested.
9
Thematic Investing
CARBON
REDUCTION
CO2
DIGITAL HEALTH &
SECURITY WELLBEING
KEY
THEMES
SUSTAINABLE FOOD ENERGY
PRODUCTION EFFICIENCY
CLEAN WATER &
SANITATION
Many managers take a thematic approach when it comes to A manager may run a more general fund such as one invested
positive screening and investing, identifying key trends e.g in global equities and use a positive overlay to invest across a
clean water and sanitation, sustainable food production and broad range of themes.
carbon reduction as areas of growth as companies seek to find
solutions to these issues.
So what is the benefit of this?
This thematic approach is then used either as a basis for the
fund or a selection of themes are implemented throughout The use of thematic investing is twofold:
the fund.
• It allows fund managers to invest for positive change by
An example of a thematic fund would be one focused on investing in companies which are providing solutions to
reducing environmental impact. The managers would look for global issues
companies which provide products or services which focus on • In cases such as social themes, where the positive impact
reducing other companies environmental impact, for example is easily measurable, it allows fund managers to identify
they could provide recycling services, filters to reduce air areas of future growth as the companies providing the
pollution or solutions to reduce consumption of a resource in solutions are operating in the areas where there is visible
the manufacturing process such as water. growing demand
Or a fund may have a social or positive impact theme by
investing in socially beneficial activities and areas such as
affordable housing, education and community services.
10
Is Socially Responsible Investment for Me?
Ethical investing is not for everyone; peoples values vary widely and what one person
views as a cause for concern may be disputed by others or they will just not consider such
issues when it comes to investing.
After reading this guide you may have a clearer idea about this area of investment and you can consider if:
There are specific areas you do not want to be invested in
Being mindful that the more areas you want to exclude will reduce the investment universe and increase risk and volatility due
to lack of diversity.
Or
There aren’t any specific areas you wish to be excluded from...
However, you would like to invest in companies that consider their environmental and social impact and in many cases look
to provide solutions to problems such as healthcare, clean water and carbon emissions. You would also like the companies
ESG policies to be considered. Many companies do take this into consideration whether or not they are in an SRI fund.
However, an SRI fund should ensure that ONLY companies which act in this manner are invested in.
Would you like any social, ethical or environmental issues to
be taken into account for your investments?
YES NO
Do you have specific Let your adviser know you are not
concerns concerned about these areas.
YES NO
Discuss these specific areas with your Discuss with your adviser that you would like to
financial adviser to ensure a suitable broadly consider these issues when investing to find
investment solution is found where possible.* a suitable investment.
* It should be noted if you have a large number of restrictions or very esoteric
restrictions it may not be possible to find suitable solutions.
11
Jargon Buster
Climate Action 100: A global collaborative investor Green Investments: A term used to describe investments
engagement initiative, launched in Dec. 17. It co-ordinates which focus on environmental issues.
engagement with 100 ‘systematically important’ companies
accounting for two thirds of annual industrial greenhouse gas Greenwashing: This is when a company or group promotes
emissions as well as 60 others with the opportunity to drive itself or its products or services as environmentally or eco-
the low-carbon transition. It asks companies to engage of friendly without following through with action. Or they
Governance, Emissions management and disclosure. promote a general service, as eco-friendly when it is actually
an industry standard.
Corporate Governance: A set of processes rules or practices
by which a company is directly controlled by balancing all the Impact Investing: Investments that measure both financial
stakeholders’ interests. It provides the framework for attaining returns and their benefit to society, aiming to achieve a balance
a company’s objectives. Stakeholders encompass everyone between the two. Often the investment is made directly into
involved from the CEO, board and management through to a specific project where returns can be seen and measured.
staff, customers, suppliers and shareholders. It essentially Such investments can be of a higher risk and potentially only
governs how a company behaves. appropriate for wealthier and more experienced investors.
Corporate Responsibility/Corporate Social Responsibility Social, Environmental and Ethical Factors (SEE): Commonly
(CSR): This describes a company’s initiatives to assess and referred to as SEE, this covers the entire range of issues in SRI
take responsibility for its effects on environmental and social and is often used in discussions on risk. Social factors refer
wellbeing. Or how their operations may impact customers, to how a company performs within communities and whether
employees, communities and the environment. The term it provides needed services or charitable donations as well
generally applies to positive efforts which go beyond that as whether it minimises its impact on the areas in which it
required by the regulators. operates. Environmental factors refer to company policy on
the environment or an environment management system to
Divestment: Green and ethical funds may divest or sell set targets for the continued improvement of its performance
stocks when they feel that a company no longer meets their in areas like energy efficiency and waste management.
investment criteria. The funds may reinvest in that same Ethical factors covers a broad range of other areas including
company, if and when they feel that it is again suitable. involvement in animal testing, alcohol, tobacco, gambling,
Engagement is often a precursor to divestment in an attempt genetic engineering, arms or the military and human rights.
to encourage companies to improve their ESG performance.
The term is regularly being seen at the moment in relation to Socially Responsible Investing (SRI): Also known as
Fossil Fuel related stocks, as pressure over reducing carbon sustainable investment, responsible investment, socially
emissions is leading people to move away from investment in responsible investment (SRI) and ethical investment. It refers
this area. to any area of the financial sector where the environmental,
social governance and ethical principles of the investor
Engagement: Engagement is the process by which investors (whether an individual or institution) influence which
or fund managers seek to maintain or improve the corporate organisation or venture they choose to place their money
social, environmental, ethical (SEE) or governance policy, the with. It also encompasses how an investor might use their
management or performance of companies through dialogue power as a shareholder to encourage better environmental
and voting practices. and social behaviour from the companies they invest in.
Investors can engage with companies to:
Sustainability: Sustainable development can be described
• Encourage more responsible business practices as development which meets the needs of the present
• Encourage greater transparency and disclosure without compromising the ability of future generations to
• Improve investment returns by encouraging companies meet their own needs. It is about balancing three goals
to manage SEE risks or to address new social or or ‘pillars’ - environment, society and economy - to enable
environmental business opportunities. communities throughout the world to satisfy basic needs
and enjoy a better quality of life, without compromising the
Ethical Investments: Normally refers to investments which quality of life for future generations.
have been screened to fit certain criteria and often includes
a negative screen to remove ‘sin stocks’ such as tobacco and Task force on Climate-related Financial Disclosures
arms as well as positive screen criteria. (TCFD): TCFD was set up by the Financial Stability Board with
the aim of establishing consistent, high quality climate risk
Environmental and Social Governance (ESG): reporting across sectors and regions.
Environmental, and Social Governance criteria are used as a
measure, by investors, of a company’s approach to dealing with Thematic Investing: Investments which follow a particular
these issues. Environmental criteria look at how a company theme which may be socially driven, environmentally
performs as a steward of the natural environment. Social orientated or a combination of both, for example a clean
criteria examines how a company manages relationships with energy fund.
employees, customers, suppliers and communities where it
operates. Governance addresses the company’s management UKSIF: UK Sustainable Investment Forum.
and internal controls; the overall management and behaviour
UNPRI: United Nations Principles for Responsible Investment
of the company. The theory is that companies with good ESG
policies should perform better, however, it should be noted UN SDG’s: United Nations Sustainable Development Goals,
that most companies including Oil and Mining companies will see page x for more details on these.
have an ESG policy now and investing into funds defined as
ESG may result in investment in areas you do not wish to be
exposed to. 12
Frequently Asked Questions
How does the performance compare?
Historically ‘Ethical Investments’ were known to
underperform as they were based on mainly exclusionary
criteria. However, this has now evolved and whilst it should
be considered that there will be times when performance
will be ‘out of sync ‘with the market if an area where there
is no exposure such as mining or oils does well, over the
long term performance is proving to be comparable, and
at times better.
Can investors be ‘a bit ethical’?
Some investors, for a variety reasons, do not want to invest
all their money into SRI funds. They should speak to an
adviser to discuss a solution that meets their needs.
If a fund has ‘sustainable’ in the title will it
meet my requirement?
Not necessarily. You always need to look carefully at the
underlying criteria and discuss with your financial adviser to
ensure it meets your requirements.
If you would like further information about ethical
investments, please contact us on 0117 452 1207 or email
[email protected].
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This publication is issued and approved by Whitechurch Securities Limited which is authorised and regulated by the Financial Conduct
Authority. Registered in England and Wales No.1576951.
The views and opinions expressed are those of the Whitechurch Securities Investment Managers. Opinions are based on information which
Whitechurch consider correct and reliable and are subject to change without notice. We have made great efforts to ensure the contents of
this publication are correct at the date of printing and do not accept any responsibility for errors or omissions.
This publication is intended to provide information of a general nature and any opinion expressed should not be treated as a specific
recommendation to make a particular investment or follow a particular strategy. Professional advice should be sought before making any
investments. Past performance is not necessarily a guide to future performance. Value of investments can fall and investors may get back
less than they invested.
Head Office: The Old Chapel, 14 Fairview Drive, Redland, Bristol, BS6 6PH Telephone: 0117 916 6150 Website: www.whitechurch.co.uk
2012b.20.09.19
