What is responsible investment and why does it matter to your workplace?

Today there’s a huge amount of interest in responsible investment – where investors factor environmental, social and governance (ESG) considerations into their decision-making. This trend was gathering momentum even before COVID-19 struck due to widespread concerns around climate change. Nevertheless, it has been further accelerated by the pandemic, which highlighted the positive impact businesses can have in the face of an existential threat to human wellbeing.

According to research by Netherlands-based Triodos Bank, COVID-19 has motivated over a fifth (22%) of UK adults to explore ethical funds, with that figure rising to 35% for the under-35 age group. Furthermore, more than half (52%) say that carefully selecting where you invest your money is one of the best ways to protect the planet while 49% would like their investment provider to be aligned with the United Nations’ Sustainable Development Goals.

A survey of over 2,000 investors, conducted by Close Brothers Asset Management, offers further insight into investors’ thought processes around responsible investment. For many, the case is clear cut – they aren’t sacrificing financial returns to align their money with their values. In fact, 85% believe that investing sustainably will either improve, or provide the same, returns as traditional investing.

Our research also found that investors have a keen awareness of how emerging opportunities and risks will shape the landscape for responsible investment in future. Nearly two-fifths (38%) think there is heightened demand among consumers for the products and services provided by sustainable businesses while 32% believe government regulation will affect companies that are not sustainable.

As responsible investment fits well with workplace financial wellbeing programmes, many employers will want to help their employees understand it better. This means getting to grips with the ever-evolving jargon in this space and being able to articulate how it can have a positive impact on employees’ personal finances.

What is responsible investment?

According to the Cambridge Institute for Sustainability Leadership, responsible investment is an approach that focuses on creating economic, environmental and social value over the long term. The Institute lists the following as different forms of responsible investment, although there is overlap in many cases:

• Ethical – where screening processes are used to screen out companies engaged in activities that are deemed unethical. Companies that produce alcohol, tobacco products or weapons might fall into this category.
• Socially responsible – social and environmental criteria are used to evaluate companies. Criteria might include occupational health and safety performance, greenhouse gas emissions and impacts on natural resources.
• Sustainable – where companies are defined as being sustainable in some way or are likely to continue into the long term. Typical ESG criteria may be applied.
• Best-in-class investment – companies that rank higher than their peers according to specific ESG criteria.
• ESG integration – where a company’s ESG qualities are analysed, based on its business model, product strategy, distribution system, R&D and human resources policies, among other issues.
• Thematic – where companies are classified according to certain sustainability-related themes eg low-carbon energy, pollution-control technology, or health care.
• Green – companies that are specifically involved with green products and initiatives, such as electric vehicles, recycling and waste management.
• Impact – investments that seek to achieve a particular social or environmental objective, for example, to provide employment within a community.
• Shareholder engagement – companies where shareholders have a positive influence on decision-making in relation to ESG matters.

Responsible investment and the workplace

Responsible investment strategies can boost both the financial and emotional wellbeing of investors. They do this by providing long-term returns, while causing investors to feel good about how they use their money. At the same time, responsible investment strategies contribute to the wellbeing of society more broadly by channelling money towards companies and initiatives that have a positive impact on people and the planet.

Given the benefits of responsible investment strategies, and the public focus on ESG issues, employees will increasingly expect their workplace pension schemes to either adopt these strategies wholesale or, at the very least, offer responsible investment choices as part of a broad portfolio. The good news is that a huge number of investment assets already fall into the ESG category. In fact, research by Bloomberg Intelligence predicts that ESG assets globally will exceed $53 trillion by 2025, representing more than a third of the total $140.5 trillion in projected assets under management.

By speaking to your own organisation’s pension provider, you can establish the extent to which it already follows responsible investment strategies and how it is planning to integrate them further in future. You can also establish which forms of responsible investment it is applying in practice. Is it simply applying exclusion screening or is it undertaking deeper and more comprehensive analysis of companies, taking into account a wide range of considerations?

Once you have this understanding, it is important to communicate with your employees on the topic of responsible investment. They will appreciate knowing more about how their money is invested – particularly where they are making a positive environmental and social difference in the long term. Having this awareness will also boost their loyalty to your organisation, making it more likely to retain their talent and skills.

Educating employees on responsible investment strategies does not just benefit society and the planet. It’s good for employers as well.