Different Sustainable and Responsible Investment Approaches

Sustainable and responsible investments offer a wide range of strategies – combining different issues in different ways. How issues are dealt with, and applied to an investment strategy, is referred to as the SRI ‘approach’.

Some approaches alter where a fund invests, others do not. All SRI strategies are implemented  alongside standard financial management methods and investment aims.  As such they form part of a fund managers investment strategy – not the entire strategy.

The main approaches taken by SRI, green and ethical funds fall into three  groups. These are:

Supporting companies that are doing positive, beneficial or desirable things – by buying into them

  • This is a key feature of themed or positively screened investments. Such investments tend to focus on certain business areas or activities that they wish to support or benefit from. Decisions of this kind are normally made with the help of specialist researchers who help fund managers to identify whether or not a company fits the criteria they are looking for. Such strategies are likely to direct investment towards particular types of companies.

Avoiding companies that do things the fund has committed to exclude – by not buying into them

  • This is a key feature of negatively screened ethical investment. Negatively screened ethical funds avoid investment in specified business activities or industries. Funds of this type typically have a list of exclusions and assess companies against a range of social, ethical and/or environmental criteria in order to decide whether or not a company is potentially acceptable as an investment. This reduces the number of companies a fund can invest in – although the extent to which this is the case varies significantly.

‘Engaging’ for positive change.  Using investment ownership to encourage progress on environmental, social, or governance issues where there is a business case for change

  • Engagement – also known as ‘Responsible Engagement’ – can be a standalone strategy (‘Engagement Only’) or applied alongside other approaches such as screening or thematic investment.  Engagement is quite different from other SRI approaches as is about what an investment house does with the assets they hold rather than relating to buy/sell strategies. Engagement activity primarily  involves using dialogue, voting and other forms of responsible shareholder activism – such as shareholder resolutions.    In most cases these are ‘regular’ funds and investors may not be aware that fund managers are seeking to influence companies with the aim of enhancing shareholder value.
  • There are dozens – if not hundreds – of retail investment funds to which engagement applies
  • A significant number of screened and themed SRI funds include engagement strategies.
  • There are one or two funds which carry out engagement and exclude a tiny number of ‘unacceptable’ companies – this is an emerging SRI strategy.

Funds can combine any number of these methods – sometimes employing different approaches to different challenges or opportunities to create an overall strategy.

Depending on which of these methods an investment manager uses some investments may be quite similar to their non-SRI sector competitors, whilst others are very different.

 

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This information is for use by UK professional financial advisers only. SRI Services is not authorised to give investment advice, if you are an individual investor you can find an IFA on www.unbiased.co.uk. The information on this site does not in any way constitute advice or recommendation. The information and tools are intended to compliment, not replace existing adviser information sources. Investment decisions should not be based on the information contained on this site alone. Please confirm fund information with fund managers. We cannot be held in responsible for advice given as a result of using this site and are not responsible for the content of sites linked to this service, we do however of course take every effort to ensure the content of this site is as accurate as possible at time of publication.