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27 March, 2019

What is Responsible Investment? Glossary of Good

As part of empower’s Glossary of Good series, Julia Tatai shares information and useful links about Responsible Investment.

At empower, we work with purpose-led organisations, who are changing the world for the better.

One such client is the UN-supported Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment.

What is Responsible Investment?

Responsible investment is an approach to investing that helps investors generate competitive returns and find sustainable solutions to many of the challenges we face in the 21st century, such as climate change and income inequality.

In particular, responsible investors seek to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk, generate sustainable long-term returns and, ultimately, develop a more sustainable global financial system.

What are Environmental, Social and Governance (ESG) Factors?

Environmental, social and governance (ESG) factors are a set of standards for a company’s operations that responsible investors use to screen potential investments.

These three factors measure the sustainability and ethical impact of an investment in a company and help responsible investors better determine the future financial performance of businesses they invest in (return and risk).

Breaking Down Environmental, Social and Governance (ESG) Criteria

Examples of environmental, social and governance (ESG) factors include:

Environmental

  • Climate change

  • Resource scarcity, e.g.  water

  • Waste and pollution

  • Deforestation

Social

  • Working conditions (slavery, child labour, etc.)

  • Conflict

  • Health & safety

  • Employee relations & diversity

Governance

  • Executive pay

  • Bribery & corruption

  • Political lobbying & donations

  • Board diversity & structure

  • Tax strategy

Why Invest Responsibly?

There are many reasons investors are turning to responsible investing.

Here are the most common:

  1. Responsible investment delivers a sound investment strategy and competitive returns and contributes to positive, sustainable outcomes in the world.

  2. Investing responsibly is an excellent and powerful way to make a positive contribution to the environment and tackle climate change.

  3. Responsible investing can help reduce risk, as neglecting ESG practices can put companies in danger of regulatory fines, loss of reputation, and many more risk factors.

  4. Responsible investors can ask for greater accountability from companies on important ethical and governance issues and their environmental and social practices.

While many responsible investment approaches aim to combine financial gains with sustainable or ethical returns, even those investors whose sole purpose is financial return should implement responsible investment practices, as it argues that to ignore ESG factors is to ignore risks and opportunities that have a material effect on the returns delivered.

Useful links on responsible investment and ESG criteria

unpri.org/pri/what-is-responsible-investment

lexicon.ft.com/Term?term=responsible-investment

pimco.co.uk/en-gb/insights/blog/10-reasons-esg-investing-is-growing

lexicon.ft.com/Term?term=ESG