Responsible investment, sometimes known as active ownership or stewardship, involves taking environmental, social and governance (ESG) issues into consideration when making investment decisions.
“It’s about investing with the goal of achieving a financial return but also taking the environment, social and governance characteristics of the investment into account, and trying to achieve an outcome that is more aligned with people’s values,” says Ian Halstead, director of investment services at L&P Investment Services, a division of Cantor Fitzgerald Ireland.
It’s done by institutional investors such as pension funds, as well as a growing number of retail investors or individuals and is something, as Halstead points out, that charities have been doing for years.
“If you are a person who is interested in climate, you won’t want to invest in an oil company which, until recently, denied climate change exists. If you’re a charity, you won’t want to provide finance to companies whose strip mining is directly affecting communities you are supporting,” he says.
Responsible investing is also becoming easier to do thanks to the EU’s transparency framework, the Sustainable Finance Disclosure Regulation (SFDR). It sets how financial market participants have to disclose sustainability information, helping investors to make informed choices.
The SFDR helps investors to properly assess how sustainability risks are integrated in the investment decision process and, in this way, contributes to one of the EU’s big political objectives: attracting private funding to help the bloc make the shift to a net-zero economy.
But what many such investors also want to know is whether a responsible investment portfolio can deliver returns similar to a standard one. The answer is: it depends.
“Given the inherent exclusions present in sustainable investments, performance may differ from more traditional non-restrictive investments. The type of sustainable financial product will also likely impact the investment performance,” explains Conal Cremen, chairman of the Sustainable Investing Committee at wealth managers RBC Brewin Dolphin in Dublin.
Under the SFDR, an Article 8 financial product (known as a light green product) is a financial product that promotes ESG characteristics but does not have any set objectives or targets to achieve.
An Article 9 financial product (known as a dark green product) is a financial product that has sustainability investment as its objective, which is measured on certain key performance indicators.
Therefore, Article 8 sustainable products will have more of a focus on investment returns than Article 9 products.
“The reality is that sustainability issues are complex,” says Cremen. “Though simple solutions are often touted, implementable answers to some of our most pressing challenges, such as climate change, nature loss and inequality, are complicated. New technologies, such as atmospheric decarbonisation, carbon capture at emissions, or alternative fuels such as hydrogen, require trade-offs, significant upfront or early capital expenditure, and take time to scale. Patient capital is often needed, which may not suit all investors.”
RBC Brewin Dolphin has a dedicated socially responsible investing list for funds with a sustainability focus and with restrictions on investment in harmful activities.
“These funds aim to deliver attractive investment returns while contributing positively to global environmental and social challenges,” says Cremen. “We believe high-quality companies that manage environmental, social and governance risks and opportunities well, will make attractive long-term investments.”
But complexity isn’t the only challenge facing responsible investment. A current concern among advocates of responsible investment is that changes in investor sentiment in the United States, an investment powerhouse which has seen some push back against ESG investing, could have ripple effects here.
“While the ESG culture wars in the US have generated headlines regarding some high-profile investors pulling funds, a large reason for outflows is likely the fact that we have seen some ‘green’ sectors, such as renewable energy, struggle over the past couple of years,” says Cremen.
“However, the long-term growth prospects for these sectors remain hugely attractive and sustainability is still relevant to everything we do. From environmental pollution and animal welfare to gender equality and human rights, investors are increasingly looking for ways to use their money as a force for good. In our view ESG isn’t dead, it’s just growing up.”
Both anti-greenwashing regulation and ESG polarisation have helped speed up the maturity of ESG, he says.
On February 3rd this year an open letter was sent to the EU Commission from investors representing €6.6 trillion of assets under management asking it to preserve the integrity of its sustainable finance framework in light of some suggested dilution under the recently published Omnibus Package, Deirdre Timmons, sustainable finance lead, ESG reporting and assurance at PwC Ireland, points out.
“I believe this in itself shows a marked commitment to move forward with the agenda and not retrench as some are suggesting,” she says.
Certainly the need to invest responsibly certainly hasn’t reduced, says Fabiola Schneider, assistant professor in accountancy at UCD.
“Climate change doesn’t care; wildfires still happen. It’s not like the USA can avoid climate change by electing a president that is not too keen on it,” she says.
EU Commission president Ursula von der Leyen remains very much committed to the Paris Agreement, and indeed has increased EU ambition, including a commitment to 90 per cent decarbonisation by 2040.
“So there is no rowing back on the responsibility that Europe is taking on,” says Schneider.