Investing For Good
An introduction to the world of ‘investing for good’, often referred to as SUSTAINABLE INVESTING and, importantly, to explain our approach to this increasingly popular investment strategy.
This ethos of sustainability already exists in the way many people buy everyday items such as clothes, groceries, and even cars. There’s demand for applying that same strategy when choosing investments for pensions and ISAs.
Underneath the ‘investing sustainably’ banner fly a number of different approaches. We believe they can be distilled into three core strategies:
ESG investing (environmental, social and governance), Impact investing and Ethical investing.
INVESTING FOR GOOD
Takes into consideration a company’s approach to ESG matters.
Those in the ENVIRONMENTAL bracket would be a company’s approach to climate change, nuclear energy, becoming carbon neutral and toxic waste.
Supports the core elements of a modern society. Issues include treatment of staff and suppliers, and to what extent a company upholds labour and human rights.
Refers to the leadership of the business, diversity in the boardroom, matters of executive pay and company stance on shareholder rights.
ESG forms part of the risk management process, because integrating more material data can improve risk-adjusted returns. Examples of non-financial data include: greenhouse gas emissions, employee diversity and financial reporting quality.
The outcome of this integration might be to prioritise or reduce exposure to certain geographies, sectors or companies. ESG leaders (those prioritised) and laggards (those reduced) can be identified in several ways.
First, by using specialised analysis – perhaps a third party ESG score – to identify regions, sectors or companies that are adapting their strategies to a more sustainability-minded planet. We call this basket of leaders Adjusters (e.g. Microsoft).
Second, we can use traditional analysis techniques to identify sectors or companies that are either innovating at the cutting edge of this transition or are enabling those that are doing the innovating. There are two baskets here: the Innovators (e.g. Tesla) and the Enablers (e.g. SSE).
INVESTING FOR GOOD
Impact investing goes a step further to invest in companies that create a product or service that has a positive measurable social and or environmental impact. The impact will be aligned to the UN Sustainable Development Goals, alongside a financial return.
For example, you might invest in a company spending on wind and solar energy and committing vast sums for important development areas such as green hydrogen.
This kind of investing will have targets separate to risk-adjusted returns. Examples of these targets include: reducing greenhouse gas emissions in-line with the Paris Agreement, or improving gender and racial diversity at the board or company level.
INVESTING FOR GOOD
Ethical investing is the integration of an investor’s moral or religious beliefs into the portfolio construction process. It is the oldest of the three pillars of sustainable investing where the approach is to exclude what are deemed to be unethical industries from your investment portfolio, such as tobacco or firearms.
Our approach to sustainable investing is a combination of ESG and ethics. Influenced by MSCI and the thought-leading Norges Bank Council on Ethics, we designed an investment policy to separate ESG leaders from laggards, and to exclude certain controversial sectors from the investments we recommend.
There are three elements to the policy: a minimum ESG Score, a minimum Coverage Ratio, and a maximum revenue threshold in any of eight controversial sectors.
We have comprehensive procedures in place to ensure daily compliance with the policy and protocols to follow if a breach of the policy is detected. These procedures and protocols have been put in place to mitigate the industry-wide problem of what is known as greenwashing. This is the term used to describe when fund groups exaggerate their green credentials.
The combination of non-financial, data-driven, risk management with a set of ethics-based negative screens is powerful in its simplicity and, importantly, will continue to evolve to match best practice in the sustainable investing ecosystem.
Our INVESTMENT TOOLKIT is wide ranging and contains a number of mandates for clients with a preference for a socially responsible investment solutions (those highlighted green):
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Tavistock Asset Management is authorised and regulated by the Financial Conduct Authority with FRN 955719. Tavistock Asset Management Limited is a wholly owned subsidiary of Tavistock Investments Plc. Tavistock Asset Management, 1 Queen’s Square, Ascot Business Park, Lyndhurst Road, Ascot, Berkshire SL5 9FE +44 (0) 1753 867000. https://tavistockam.com – email@example.com
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