"Doing well by doing good" is a growing trend in the investing community and the marriage of "business", "ethics" and "investment" continues to gain support from a broad spectrum of investors. Many fund managers are considering SRI and ESG concepts when making investing decisions.
What is SRI?
Sustainable, Responsible, Impact (SRI) investing is an investment approach that integrates ESG factors in the investment process. This process can apply to all asset classes: equity, bond and private equity, just to name a few.
SRI invests in companies with a sustainable business plan and the objective to generate long term competitive financial returns as well as contributing positively to society.
What is ESG?
- E stands for Environment. E factors include climate change, air pollution, water use and waste recycling.
- S is for Social. S factors include labour rights, health and safety, supply chain standards, customer right protection.
- G is for Governance. G factors include corporate governance, business ethics, bribery and corruption, executive pay.
Different SRI strategies
Negative screening excludes investing in industries such as tobacco, alcohol and defense.
Norms screening excludes investing in companies which are not compliant with international norms (e.g. UN Global Compact, International Labour Organisation).
Integration combines traditional financial analysis with the explicit consideration of ESG factors.
Engagement policy aims to influence corporate behavior to change positively by the use of shareholder power, such as communicating with management, filing resolutions for more transparency, disclosure and proxy voting.
Impact Investing includes investments made into companies with the intention to generate a positive social and environmental impact as well as a financial return. There is a commitment to measure and report social and environmental performance to ensure transparency and accountability.
Examples of social impact reporting are the number of jobs created, the increase of income among the farmers, the number of young people for higher education and the number of women becoming micro entrepreneurs.
Measurement and reporting of impact are now linked to the 17 UN Sustainable Development Goals.
The integration of ESG factors into investment analysis helps identify good quality companies with sustainable business. It also contributes to minimizing risks as ESG failures can be costly to investors.
Every client is different and holds different world views. If you would like to discuss how values can influence investing and your portfolio, please contact me.
References from BNP Paribas and NEI Investments.
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