Ethical Investing

What is Socially Responsible, Environmental, Social and Governance (ESG) investing?

In a rapidly changing world, investors have, in increasing numbers, begun to recognise that a new approach is needed to assessing investment risk.  While our modern, free market economy has emerged as the most efficient system for allocating economic resources, it is also leading to a growing list of social inequalities, environmental impacts and negative effects around the world.  Unprecedented environmental and social pressures driven by food, water and energy security, access to natural resources, climate change, human rights, labour standards and ageing populations have become material issues that businesses are grappling with globally. The impact of poor corporate governance on shareholder value, highlighted by the recent global financial crisis, has also elevated issues such as transparency, corruption, board structure, shareholder rights, business ethics, risk management and executive compensation to the top of the investor agenda.

Responsible investment is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and the long-term health and stability of the market as a whole. It recognises that in order to generate long-term sustainable returns, we require stable, well-functioning and well governed social, environmental and economic systems. It is driven by a growing recognition in the financial community that effective research, analysis and evaluation of ESG issues is a fundamental part of assessing the value and performance of an investment over the medium and longer term.  This analysis should inform asset allocation, stock selection, portfolio construction, shareholder engagement and voting. Responsible investment requires investors and companies to take a wider view, acknowledging the full spectrum of risks and opportunities facing them.

Investors taking a broader view

Mounting evidence of the financial materiality of ESG issues, alongside growing demands from regulators, clients and beneficiaries for more sustainable approaches to investment, are among the key drivers behind the adoption of responsible investment practices worldwide.  Additionally, investment markets themselves have, since 2008, paid increasing attention to ESG issues, as they emerge at a company level, reflecting them rapidly into asset prices.  Investors and money-managers concerned about the impact of short-termism within investment research, asset allocation, and performance monitoring recognise that integrating ESG issues into both investment analysis and stewardship practices forms part of their fiduciary duty to clients and beneficiaries and want to see their portfolios managed in a way that systematically assesses drivers of risk and return over longer timeframes.

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