What is responsible investment?
The development of responsible investment
Some researchers believe responsible investment has its roots in the Quaker movement in the 17th century, and some believe it began with the anti-apartheid movement of the 1980s. Prior to the 2000s, investment decisions often took a strongly religious viewpoint and investors brought their own ethical stand to investment activities; but in the 2000s there was an increasing shift from ethical investment to responsible investment and to more extensive investment strategies.
Responsibility also encompasses returns
A responsible investor is not, primarily a philanthropist, but an investor whose goal is to generate as good a return as possible for their portfolio. The issue is the means by which these returns are generated, and responsible investment does not automatically mean higher or lower returns. It is mainly about a different risk profile, as companies complying with the principles of sustainable development also seem to make sure that they meet their financial obligations, which reduces the risk level. It is also possible to maximise returns in the longer term.
An investor with the greatest potential for excess returns is one who also takes into consideration items that extend beyond traditional financial reporting, who knows the investment targets better and who can recognise both risks and opportunities on a larger scale. On the other hand, excluding certain sectors has been seen to weaken returns in many cases.
Approaches to responsible investment
Responsible investment can be approached from many angles, the most common of which are positive and negative screening, engagement and integration On the basis of these, investors can select or combine the most suitable method for themselves or for their organisation.
Positive screening can happen in two ways: either by using the Best-in-Class method to opt for companies that have been exemplary in adopting responsible business practices in their sector, or by devising an investment strategy that is based on a theme pertaining to responsibility and sustainable development. Companies that act in a responsible manner are believed to have an advantage over their competitors in terms of risks and returns, for which reason they are also perceived as better investment opportunities. The underlying notion is that when consumers and investors favour a responsible industry pioneer, others will soon follow suit and the entire industry will gradually become more responsible.
Negative screening is the most conventional way to invest responsibly, and it refers to excluding certain sectors or companies from the investment portfolio. This negative approach stems from the investor’s personal values, leading the exclusion of certain fields of business, manufacturers or retailers. Globally accepted norms and regulations also provide a framework for deciding which investments are to be excluded from the portfolio.
Engagement refers to active ownership, in which investors use their ownership rights to promote more responsible corporate operations and to ensure investment profits. Investors can make use of their ownership rights in a number of ways: by holding discussions with the company, by participating in decision-making at general meetings and by co-operating with other owners to reinforce the effectiveness of discussions. Dialogue can take the form of direct discussions with the company or it can happen indirectly, with the help of a third party representative. It can be pre-emptive, for example, seeking information on how responsibility is being implemented in the company, or it can consist of a reactive discussion related to a single circumstance. If these discussions do not result in the desired outcome, the company can be eliminated from the investment portfolio completely.
The goal of responsible investment can be considered the integration of responsibility criteria into the organisation’s investment and decision-making process, with responsibility forming a part of all investment decisions rather than being managed in a separate unit.