What is socially responsible investing?

An investment approach that considers social and environmental good as well as financial return. This is often used as an umbrella term that encompasses various approaches, one of which involves incorporating ESG factors in an investment process.

Take a look at our selection of socially responsible investing (SRI) funds.

What are the E, the S, and the G?

Environmental, social and governance (or ESG), are non-financial considerations that inform investment decisions based on an assessment of the risks these factors pose to your investments. ESG is not about what a company manufactures or sells but how it goes about it.

ENVIRONMENTAL

Takes into account the impact companies are having upon the planet today and in the future.

  • Pollution, waste and emissions
  • Raw material sourcing
  • Native bio-systems and species
  • Renewable energy and efficiency
  • Recycling

SOCIAL

Takes into consideration the social impact the companies are having upon people in the world.

  • Human rights
  • Workers conditions and rights
  • Corporate citizenship
  • Wider community
  • Consumer protection

GOVERNANCE

Considers the structure, procedures and practices by which a company is controlled and directed, including the diversity of senior management and their remuneration.

  • Business ethics
  • Equality and Diversity
  • Fair treatment of labour
  • Health & safety
  • Shareholder rights

What factors can you consider?

Watch our videos to give you more information about what these ESG factors look at how you can consider these in your investments.

Our socially responsible investing funds

Socially responsible investing (SRI) funds from the Foundation Fundlist have been selected for their investment credentials as well as their genuine commitment to having a positive impact on society and the environment.

Baillie Gifford
Positive Change

Brown Advisory US
Sustainable Growth

EdenTree Amity
International

Fund philosophy

This sustainability-themed fund aims to contribute toward a more sustainable and inclusive world by investing in companies addressing critical challenges in areas such as social inclusion, education, quality of life and the environment. The managers aim to generate and measure the positive impact from investments as well as make money, and there is an active approach to engagement and voting.

Our view

An adventurous option investing in shares in companies from around the world. The managers search for exceptional, fast-growing businesses and run a high-conviction, concentrated portfolio, which increases risk as well as return potential. We believe the managers are patient investors with a strong process for identifying future winners.

Fund philosophy

The managers believe companies making the right investment decisions for their long-term sustainability should continue to compete and thrive for decades to come.

As part of the stock selection process, a team of analysts carry out ESG research in order to develop a proprietary view on over 30 factors to identify risks and uncover companies that solve critical problems.

Our view

The fund aims to achieve capital growth by investing in US equities, with the managers selecting a concentrated portfolio using three key criteria: Fundamental strength, long-term sustainability and attractive valuation. Investors can expect the portfolio to be invested in solid and reliable business, but that are generally trading at higher valuations than the market as a whole. The fund also typically carries heavy exposure to the healthcare and technology sectors.

Fund philosophy

Edentree is owned by a large national charity and has been a pioneer in socially responsible investment. This fund uses both positive and negative screening. Negative screening is fairly strict and excludes areas such as alcohol, tobacco and weapon production, gambling. Meanwhile, the fund prioritises companies that make a positive contribution to society and the environment through sustainable and socially responsible practices. There is an active approach to engagement and voting.

Our view

The managers invest in shares in companies from around the world. Unlike many funds the aim is to uncover shares that stand out as offering good value - perhaps because their sustainable attributes have been overlooked. We believe the fund offers a differentiated portfolio and important diversification from more the more common growth-oriented global equity funds that use ESG criteria.

Liontrust Sustainable
Future UK Growth

Threadneedle UK
Social Bond Fund

WHEB Sustainability

Fund philosophy

This fund uses positive screening to invest in UK company shares that meet the managers' rules for environmental and social responsibility. They aim to buy attractively valued companies that offer a product or service benefiting from environmental or social trends, or can generate superior potential performance through strong environmental, social and governance credentials

Our view

We believe this represents a strong option for those wishing to invest in UK shares. The management team is highly regarded having established a track record at Aviva and Alliance Trust prior to joining Liontrust. There is a bias to quality 'growth' companies due to the focus on sustainability themes likely to benefit from long-term trends.

Fund philosophy

This fund, a partnership between Columbia Threadneedle and Big Issue Invest, takes an impact investing approach, supporting social and economic development in the UK and targeting positive social benefits. It seeks to back companies and organisations in supporting activities in areas such as affordable housing, education, social care, financial inclusion, community services, transport and the environment.

Our view

This is a bond fund investing in the debt of companies and institutions rather than in shares. Bonds are generally lower risk than shares but unlike cash capital is not secure. Investors should expect a modest return, primarily in the form of income. Bond funds like this one can offer exposure to finely targeted social outcomes through investments backing various organisations including charities, housing associations, mutual associations, financial institutions and government agencies.

Fund philosophy

WHEB Asset Management targets opportunities created by the transition to a low carbon and sustainable global economy, a sustainability-themed approach with an emphasis on positive screening. The manager has been highly innovative in quantifying the environmental and social benefits of an investment in the fund through annual reports and an online calculator. They also regularly engage with investee companies on ESG issues.

Our view

The fund invests in shares of companies from around the world and should be considered moderately adventurous. There is some exposure to higher risk smaller firms, plus companies providing solutions to sustainability challenges can be more economically-sensitive. The managers are highly experienced in sustainable and impact investing and have a clear philosophy and approach.

Rathbone Ethical
Bond

Stewart Investors Asia
Pacific Sustainability

Fund philosophy

This bond fund applies a broad range of positive and negative screens. Thematic research is conducted through topics such as climate change, clean energy, human rights, community investment and employee welfare. The bulk of the portfolio is invested in the bonds of multinational companies and institutions that pass the screens, and there are also a number of charity and green bonds in areas such as social housing, sustainable transport and renewable power.

Our view

This is a broad corporate bond fund. Risk is generally lower than shares, but unlike cash capital is not secure. The manager aims to build a portfolio of high quality investment grade bonds and provide a decent income. As certain sectors are excluded on ethical grounds, such as oil & gas, and tobacco, the fund tends to have heavier exposure in financials through insurers and banks. At times this could add to the risk, but we think this is a strong option for UK bond exposure for investors looking for a decent yield.

Fund philosophy

Sustainable investing has been a central part of this team's ethos since the 1980s. The approach is centred on the responsible stewardship and active ownership of capital, and in this fund the managers will only select companies they believe have the best long-term sustainability credentials. They scrutinise management integrity, interaction with employees, suppliers, and customers, and the impact on the local community and environment.

Our view

The fund shares the same process, management team and overall philosophy as Stewart's larger, more established funds that have specialised in Asian markets for several decades. The area is higher risk, though by prioritising good-quality businesses and analysing the sustainability performance of companies the team believes it can better identify hidden risks and enhance long term returns for investors.

What does all the different terminology mean?

Is socially responsible investing the same as ethical investing?

No, albeit they have similarities; ‘ethical’ investing focuses on avoiding investing in companies involved in areas deemed harmful to society and the environment, such as weapons, gambling, tobacco and coal mining, sometimes also referred to as ‘negative screening’ or ‘exclusion’. Certain investments might also be excluded for not complying with international standards of conduct, for example, the UN Human Rights Declaration. Exclusions are often based on beliefs about industries, countries and risks and potentially can impact on financial returns positively or negatively. Because there can be different views as to what constitutes harmful activity, it is always important to read the fund or portfolio literature so that you understand the basis on which your investment will be managed.

What is ESG integration?

Using ESG factors does not automatically mean a fund or investment portfolio is ‘sustainable’ or ‘ethical’, simply that ESG factors are included systematically in that manager’s financial analysis – often from the perspective of the impact that ESG factors may have on an investment’s potential financial return.

What is corporate governance?

The structure, procedures and practices by which a company is controlled and directed. Effective governance takes into account the interests of all stakeholders, for example, customers, employees, suppliers, shareholders, investors and the wider community affected by the company’s activities.

What is negative screening?

Avoiding investing in companies engaged in what are perceived to be harmful activities, such as tobacco, gambling or manufacturing weapons. Negative screening, or ‘exclusion’, is how many values-based ethical funds operate. You should always read the fund or portfolio literature to understand the basis on which your investment will be managed.

What is positive screening?

Rather than avoiding investment in certain areas, the manager will assess each sector for opportunities to invest in companies with stronger ESG characteristics than their industry peer group, for example by looking for 'best-in-class' companies in which to invest or favouring those that contribute more positively to society or the environment. This implies that no particular area or sector is explicitly excluded, unless combined with ‘negative screening’, and ‘best in class’ companies in any sector may be considered. Certain investments focusing on a particular theme, such as clean energy or climate change solutions, may also use this broad approach in order to target areas of interest.

What is best-in-class?

A term used to describe a company leading in its sector in terms of it ESG credentials, relative to its peers. Unlike a ‘negative screening’ approach, Best-in-Class would not be looking to exclude all companies in a particular sector. An example would include investing in the most energy efficient/lowest carbon energy producer.

What is thematic investing?

An investment approach that focuses on certain areas of activity, in this context one or more specific ESG categories. Examples of themes include resource scarcity, renewable energy and equal opportunities. By identifying and harnessing themes, investors hope to benefit from higher growth or profitability in those areas.

What is impact investing?

Impact funds usually target firms making a measurable positive impact on society or the environment, as well as generating a financial return. They might, for instance, invest in companies directly tackling challenges such as climate change, water management, pollution or inequality. Impact investing is often associated with lower financial returns, though this is not always the case.

What is engagement?

Purposeful dialogue by investors with companies on ESG and other matters in order to promote responsible business practice by them. Engagement can help drive positive change as well as enhance an investors’ research, providing insight into company strategy, competitive positioning and efforts to manage risks and opportunities.

What is stewardship / active ownership?

Stewardship is defined in general terms as the responsible management of something entrusted to one’s care. In terms of investing, stewardship typically aims to promote the long-term success of companies through monitoring and engaging with their strategy, performance, risk, structure, and corporate governance, including culture and remuneration as well as social and environmental issues. The goal is to enhance shareholder value and help companies to achieve their potential, as well as leading to long-term benefits for society and the economy. It will likely involve a significant dialogue between investor and company and actively voting at shareholder meetings.

What is sustainability / sustainable investing?

Historically used interchangeably with ‘responsible investing’, a sustainable investment strategy takes a long-term view aiming to generate investment returns while fulfilling certain sustainability (often ESG) criteria and/or delivering on specific and measurable positive sustainability outcomes. Investments are chosen on the basis of their economic activities (what they produce or what service they deliver) and on their business conduct (how they deliver their products and services). More broadly, sustainability means meeting the needs of the present without compromising the needs of future generations.

What is greenwashing?

Organisations accused of ‘greenwashing’ are those that, for marketing purposes, present themselves or their products as more focused on environmental or sustainability issues than they really are.

What is green investing?

Investment in companies contributing to better environmental practices in areas including investments in renewable energy, energy efficiency, clean technology, low-carbon transportation infrastructure, water treatment and resource efficiency.

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