How to get started as a responsible investor

Good Money Week, 2nd to 8th October, is an initiative aimed at identifying and overcoming the barriers that prevent people managing their money sustainably.

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  1. Rob Morgan

Investing money for good rather than just profit has now become mainstream with the amount invested in environmental, social and governance (ESG)-labelled funds now around $2trn worldwide. Our own research has found that almost half of UK investors (48%) expect to increase their environmental, social and governance (ESG) investments over the next three years, with one in six (17%) planning to do so significantly.

This popularity is likely to continue as investors increasingly demand to support environmental and social initiatives as well as secure decent returns. Continued growth is also going to be vital in solving many of the world’s most pressing issues from climate change to inequality.

Yet it’s not necessarily a straightforward exercise for those new to investing. For starters, there are lots of labels and terminology surrounding the area - sustainable, ethical, responsible, green, impact and so on. This can make things confusing. The industry is increasingly standardising what is meant by these, but it still has some way to go to communicating terms to investors, especially those who simply have a general sense that they want their money to do good but are not sure how best to achieve it.

Another challenge is the subjectivity of many of the issues involved. To some extent, it is a matter of opinion whether a company does ‘good’. There are inevitably elements of good and not so good in all businesses. In addition, once something is declared good or bad, measuring how good or bad it is can be a complex exercise with various methodologies coming up with different answers.

Many people also assume that this form of investing is primarily about promoting environmental good – but that is often only one dimension. It is the ‘E’ in the industry acronym ESG, a framework for assessing companies according to groups of factors. The other elements are ‘Social’ and ‘Governance’ which span all sorts of areas such as consumer protection, human rights, labour management, corporate governance, gender diversity and data security, among many others.

There are many ways to slice and dice the universe of global companies into a portfolio aligned to the ‘greater good’ as seen through a pre-determined lens. What to prioritise and how is a source of constant debate in the financial industry, which means an investor does need to be satisfied that any approach chosen meets with their own feelings and principles. With this in mind here’s some key things to consider when choosing a responsibly managed investment fund.

  1. Investment philosophy and process

The level to which fund managers are fully embracing socially responsible investing principles, or merely paying lip service, can often be evidenced by the core philosophy of the fund and in fund reporting. There is no right or wrong way to go about being an authentic advocate of this form of investing. Everyone has their own views, but a fund’s literature should at least tell you how ESG factors are used and how it is it embedded in the investment process. If it’s an ‘add on’ or extra filter, for instance if all ESG research conducted by a third party, there may be greater reason for scepticism that it’s a box ticking exercise rather than a key process at the heart of the approach. If the fund produces ‘impact assessments’ of portfolio holdings this can also help to reduce the risk of immaterial characteristics in underlying investments being dressed up as “green” or “sustainable”.

  1. Research and data

Looking at whether a fund relies on in-house or third-party research can be informative. Proprietary research can often augment the process and help spot and filter out greenwashing in underlying investments. Ratings can be really helpful, but the disagreement between different agencies shows that they should not necessarily be relied upon in isolation.

  1. Voting and engagement policies

Socially responsible funds holding shares should be voting their shares on key issues, notably environmental proposals, and this can provide an indication as to whether a fund manager is genuinely aiming to engender change. Private forms of engagement are also important. Many funds document how they have engaged with investee companies on their websites, which often provides useful insights into their own culture and views.

  1. Signatories

Fund groups running explicitly responsible investments ought to be signatories of the United Nations’ Principles of Responsible Investment (PRI), a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. Fund managers and asset owners might also be signatories of the UK Stewardship Code 2020, which establishes a benchmark for the responsible allocation, management and oversight of capital to create long-term value for clients as well as sustainable benefits for the economy, the environment and society. Some fund groups have more specific pledges.

  1. Transparency

People who want their money invested in a socially responsible way should ideally be able to see all a fund’s portfolio – not just the top ten holdings as commonly disclosed. That way all the underlying companies can be checked as necessary.


Find out more about responsible investing and explore our fund ideas here.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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