Explaining and Exploring Sustainable Investment - Flipbook - Page 7
ETHICAL
SUSTAINABILITY THEMES
ENGAGEMENT
Avoid
Find
Influence
Looking through all this language, however, there are basically
three core approaches to understand – the avoid, find and influence
outlined in the image above – and most of the descriptions fall
into one of these. Most sustainable fund managers offer some
combination of the three but however things are described, the
most important thing is how much sustainability factors actually
affect investment decisions. Is it resulting in significantly differentlooking funds than those offered by mainstream peers?
The first strand is traditional ‘ethical’ investing, which is largely
about avoiding certain industries because of the negative effects
of their products, with standard examples including tobacco
companies, fossil fuels and producers of weapons. This dates
back to the beginning of this kind of investing and can trace its
roots back hundreds of years; as outlined at the outset, for many, it
remains the stereotypical image of ‘green’ investing.
Second, is the fast-growing world of sustainable investing, which
includes the light green, SRI, ESG and impact monikers under its
umbrella. While the first branch is all about excluding various
types of company, or what funds do not own, sustainable focuses
on what they do via so-called positive screening. This is about
finding companies that, in broad terms, are trying to make the
world a better place, whether through more effective healthcare
and communication networks, more efficient and cleaner energy,
or safer transport, for example.
This is where the ESG side comes in and the industry continues
to develop ways to assess companies pushing ahead on these
environmental, social and governance criteria. As we outlined,
there is a wealth of evidence to show companies that perform well
in ESG terms are likely to produce attractive investment returns.
Defining ESG
Environmental
Social
Governance
Climate crisis
Energy efficiency
Biodiversity
Plastic pollution
Water and waste management
Supply chains
Human rights and modern slavery
Employee safety and opportunity
Labour standards
Gender and ethnic diversity
Bribery and corruption
Corporate ethics
Remuneration
Product safety
Audit and compliance
Sustainability can be a difficult concept to agree and we find a useful
starting point is the definition used by the UN World Commission
on Environment and Development: ‘sustainable development
meets the needs of the present without compromising the ability
of future generations to meet their own needs.’ Going back to
those traditional ideas about ‘green’ investment, it is important to
understand this goes far beyond just environmentalism – although it
continues to play a part.
Sustainable practices also support ecological, human, and
economic health and vitality – the S and the G are as important
as the E within ESG – and concerns about social and economic
equality are embedded in any genuine definition of sustainability.
Sustainability presumes resources are finite and should be used
conservatively and wisely with a view to long-term priorities; in the
simplest terms, it is about our children and grandchildren and the
world we want to leave them.
Finally, a third approach is known as engagement, or active
ownership, where fund managers look to influence the companies
they own into changing their strategy or operations for the better.
This can be reflected in voting at Annual General Meetings to impact
the business, looking to improve labour rights in the company’s
supply chain or driving change in areas such as employee safety,
diversity or remuneration.
Liontrust: Explaining and exploring sustainable investment - 7
