Ida Johannesen, Head of Commercial ESG, Saxo Bank
As we stand at the crossroads of finance and conscientious decision-making, Sustainable and Responsible Investing (SRI) has emerged as a guiding light in reshaping investment portfolios. SRI goes beyond traditional financial metrics by integrating Environmental, Social, and Governance (ESG) factors into the investment landscape.
This paradigm shift signifies a departure from profit-only motives to a more holistic approach, where financial gains are thoughtfully aligned with broader societal and environmental considerations.
What is Sustainable and Responsible Investing?
Sustainable and responsible investing involve making investment decisions to create positive social impacts. This approach focuses on allocating funds to companies committed to environmental stewardship, social responsibility, and employee well-being.
Sustainable and responsible investing is often called socially responsible (SRI) or sustainable investing. Despite its recent popularity, the roots of socially responsible investing can be traced back to the 1700s, potentially originating with the Quakers, a religious group in the United States that opposed participation in the slave trade.
Today, similar societal impacts are felt across many investing spheres.
Responsible Investing Doesn’t Mean Lower Returns
Some investors may think that responsible investing means compromising on returns, but that’s not necessarily the case. Many SRI assets provide returns similar to the broad market. The Who Cares Wins report found that companies focused on sustainable business practices often outperform those focused exclusively on profit.
Certain investments offer below-market returns but are not representative of the entire responsible investing sphere.
ESG Factors to Consider
When making SRI investments, you need to consider certain factors. These are collectively known as ESG factors. In general, there are three ESG factors, which are:
- Environmental – Environmental factors look at a company’s impact on the environment. Key issues that fall under these factors are carbon emission, waste disposal, resource depletion, noise pollution, etc.
- Social – Social factors are associated with how a company (and the assets linked to it) creates a positive social change. This includes gender diversity, inclusion of minorities, uplifting the disadvantaged, or preserving indigenous rights.
- Governance – The governance factor implies how well the company is being run. This pertains to ethics and moral standards: insider investing, financial malpractice, level of accountability, and the board of directors composition and independence.
Steps to Make Socially Responsible Investments
A growing number of investors, male and female, young and more mature, are engaging in SRIs in a bid to better the world. There are simple steps to help people get started.
- Negative Screening
Negative screening is pivotal in responsible investing by excluding specific industries identified as harmful to society. These are known as “sin stocks” and include gambling, tobacco, alcohol, weapons and, more recently, Oil & Gas. Companies engaged in practices like child labour or inadequate worker compensation may also be excluded. Investors should avoid sectors and industries not aligned with their values, and a quick check of the industry a company belongs to is the 1st step in the screen.
- Positive Investing
Not investing in companies that are engaged in harmful practices is one thing. Investing in companies that benefit the environment and society takes it up a notch. Here, one chooses to invest in companies that have a positive impact and score better than their peers on ESG metrics.
For a company, this could involve reducing its overall carbon emission, providing water solutions, pushing the diversity, equity and inclusion agenda, or conserving rainwater. All these efforts bring positive change to both the environment and society.
- Integrating ESG
This is the most popular type of responsible investment. In addition to traditional fundamental analysis, an investor considers what ESG factors a company is exposed to and how the company manages those risks and takes advantage of ESG opportunities. Integration is more demanding than negative and positive screening, requiring more profound analysis. An easy way to access ESG-integrated strategies is through ETFs and mutual funds rather than individual stocks.
