It’s no secret that socially responsible investing now occupies centre stage amongst investors and asset managers.

Just over a month ago, we analysed this trend from two perspectives: performance and volume of capital allocation by investors compared with traditional assets.

In this article, we explain another key dimension of this trend: How can we implement socially responsible investing processes?

There are six aspects to consider:

1. Exclusion

This consists in avoiding companies or sectors that are regarded to be controversial because of their detrimental impact on society and/or the environment. Exclusionary screening can be performed on several levels:

• Product: weapons, tobacco, gambling or fossil fuels

• Activity: coal or oil production

• Standards: companies with sanctions or embargoes

• Behaviour: companies embroiled in corruption or human rights violation scandals

2. Integration

Asset managers reformulate their investment process from scratch. They do this by including new mechanisms to measure the degree of sustainability of their investments, this being an efficient way of generating profitability and adjusting their level of risk.

They are leveraged on external data providers that measure different ratios:

• Environment:

• Energy consumption
• Paper consumption
• Water consumption

• Social responsibility:

• Percentage of women in management positions
• Staff redundancy ratio

• Governance:

• Size of management team
• Percentage of independent directors

3. Engagement

Major asset managers are often the main investors in companies. This puts them in a privileged position when it comes to encouraging companies to implement changes that will make them more sustainable in the future. One of the clearest examples of this is when asset managers vote at annual general shareholders’ meetings.

4. Best in class

This methodology consists in only choosing companies with the best sustainability ratios in each sector, based on data provided by external sources.

5. Thematic

In this case, we are not talking about traditional funds but vehicles that focus solely on investing in specific trends. This leads to portfolios focused on topics such as climate change, renewable energy, water or innovation in sectors such as health.

6. Impact investing

In this case asset managers raise capital to finance specific projects aimed at improving infrastructure, education, healthcare, employment opportunities or economic development in depressed geographical regions. The focus is clearly on generating a positive impact for society over and above the end profitability.

What are the main strategies used by the asset management industry?

Source: GSIA

In conclusion, there is no single strategy that is better than all the others because they all pursue different goals. For example, as we move from exclusionary screening to impact investing, we increase both the degree of sophistication and the ethical component of the investment approach.

The chart below shows the connection between the different strategies in terms of expected return and ethical motivation of the investment

 

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For further information, please contact your Investment Advisor.