Responsible investing has been a rising megatrend for a few years now. In addition to returns, more and more investors are also interested in where their money is going and the impact our investments have on the world around us, and how we treat each other.
In many cases, one may come across the idea that responsibility and income are mutually exclusive. Fortunately, this is not the case. As investors, we can make investment decisions that benefit both us and the world around us.
What kind of investor do you want to be?
What are the values that are important to you in your daily life? Have you considered how you could also act by your values when choosing investment products? The world has changed and is changing more and more rapidly around us. If people say through their investments that they want companies to act more responsibly, then the pressure on companies to change their practices will increase to secure their future.
What is responsible investing?
The UN Principles for Responsible Investment abbreviated ESG, helps to define responsible investing. The abbreviation consists of three words: Environmental, Social, and Governance. According to these principles, a responsible company takes into account environmental, social and good governance practices.
1. Environmental responsibility
From an environmental point of view, responsibility can be seen, for example, through how a company’s operations affect nature and climate change. For example, does it seek to reduce emissions, does it recycle the waste generated by its operations, and does it comply with various certificates?
2. Social responsibility
Social responsibility refers to how a company takes humanity into account in its operations. Are fairness and equality achieved in the company? How does the company treat its employees and does it respect human rights? Does the company ensure that working conditions are safe? Surely everyone has sometimes spotted in the news how shortcomings have emerged in the operations of a companies’ production company in another country. Workers have not been paid a reasonable wage or a factory in poor condition has collapsed, meaning the workplace itself has not been safe. By supporting certified and controlled production, we can change production standards in a more sustainable direction, even in so-called high-risk countries.
3. Good governance
Good governance looks at whether a company pays taxes, how reliable it is perceived, or whether it is potentially corrupt. Good corporate governance also examines how the company is managed and what the company’s management is like.
Responsibly by investing a low risk
Corporate responsibility reduces the risk associated with investing and that is why responsible investing is worthwhile. In the ESG analysis, the risks related to the responsibility of the investment object are analyzed more extensively than the usual risk analysis of investments. Based on the analysis, the companies are given their ESG rating, which allows the investor to compare the corporate responsibility. The value of a company with a high ESG rating fluctuates less and its development is more even than that of a company with a low rating and higher risks.
Irresponsible actions can cause scandals
The irresponsible activities of a company can be reflected in the income of those who have invested in the company. A good example of this is the Volkswagen scandal unveiled in 2015, in which the company, which became the world’s largest carmaker in the very same year, covered up the actual emissions of its cars by manipulating software to measure them. Due to the emissions scandal, the value of the company fell in the stock market and it lost confidence in the eyes of both investors and consumers.
How does responsibility pay off?
A positive example of the benefits of responsibility is Unilever. The company set itself the goal of not generating any landfill waste from its operations. The company reached its target a few years later and now no landfill waste is generated at Unilever’s more than 600 sites. The savings achieved by the program are up to EUR 200 million. The achievement is proof that the company can act responsibly and at the same time be very productive.
How can responsibility be exercised in your investment strategy?
Responsibility methods are processes that anyone can take advantage of when choosing investment products.
The strategy process starts broadly, with a wide survey of the external and internal context in which it will be developed (Step 1). This is used to define the organization’s vision for the future and its mission (Step 2), followed by a more specific set of investment principles (Step 3). The process then narrows in on selecting executable strategies and strategically allocating capital (Step 4). Once completed, the investment strategy will be translated into initiatives for implementation.
To be effectively embedded in the organization, and responsible investment considerations must be part of the core investment strategy process.