Here we explain how investment managers use ESG, alongside other financial analysis, to help assess the risks and opportunities for the companies they’re thinking about investing in.
Investment managers look at how a company’s impact (positive or negative) on the environment, society and people will affect its future performance, which in turn may affect returns for investors. That’s why ESG is relevant to everyone, not just those who have specific concerns about these issues.
Investment managers will look at the following areas:
What’s a company’s impact on land, sea, air, wildlife, plant life and the climate? This covers things like energy consumption, waste disposal, land development and carbon footprint.
What’s a company’s relationship with its employees, suppliers and the community where it operates? This covers things like labour practices, human rights, employee wellbeing and health schemes, and supplier relationships.
What issues might affect the company’s management and processes? This covers things like who’s running the company, how the company and its finances are managed, and the company’s approach to salaries and strategy.
ESG is a useful indication of the overall quality and value of a company
Understanding a company’s management of ESG factors – and therefore any associated risks the company may face – can help managers better value what they’re investing in. Please be aware though that you may still see holdings which would be excluded from funds that apply screening or thematic approaches. So investments which could be seen as negative may still be included.
Remember, your employees’ pensions are invested to help them grow. That means the value of their investments could go down as well as up, and they may get back less than was paid in.
The positive role of stewardship
As steward of an investment, a manager can influence positive change
In its broad sense, stewardship means overseeing or taking care of something. Investment stewardship is no different; it’s about engaging with companies to understand all the risks and opportunities they present, to promote their long-term success. Doing this benefits everyone; from the individual company, to its investors, to the economy as a whole.
By regularly talking to the management of the companies they invest in, investment managers can better understand their strategy, performance, risk, capital structure and corporate governance. It’s a way to spot both opportunities and risks, as well as to:
- influence positive corporate behaviour
- encourage better sustainability, resource efficiency and involvement with society
Proxy voting (casting votes on behalf of investors)
Another way that investment managers can influence change is to use voting rights. That’s when they cast votes on behalf of investors on matters such as good governance, climate change, tax practices, labour standards, diversity, bribery and corruption.
More about screening and thematic approaches
Investors can choose from a wide range of funds that aim to achieve a financial return alongside a specific ethical, environmental or social outcome. These types of funds are often described as using ‘screening’ or ‘thematic’ approaches.
Funds are screened and filters are applied to rule investments in or out, based on objectives, preferences, values or ethics. This could be removing investments which could be seen as negative, or searching out investments which are trying to make a positive impact.
This includes ethical funds.
Investing in companies with the explicit intention of addressing a social or environmental issue. For instance, affordable housing, renewable energy solutions or sustainable transport.
This includes impact funds.
You may know about these funds in the following categories. Some apply screening, some focus on a theme, and some use a mix of these approaches depending on their objective.
These tend to avoid investing in companies connected to activities like animal testing, tobacco and weapons – negative criteria, where certain investments are ruled out. Some funds focus on positive criteria, in other words companies which make positive contributions to the environment and society. And others use a combination of both positive and negative criteria.
Sustainable/socially responsible investment (SRI)
These invest in companies that balance business interests with the effect they have on the environment and community.
These invest according to religious principles or laws. For example, Shariah investing aligns its investment principles with Islamic law.
These invest in companies that intend to make a positive and measurable contribution to the environment or society. The companies might do this through its products, services or business operations.
We support you and your employees at every stage by making sure our flexible investment options evolve to reflect changes in legislation and employee needs.Discover what we mean by ‘investment governance’