SRI: Sustainable, responsible and impact investment

Luke Tribe from our Research team explains sustainable, responsible and impact investment.

SRI is a broad brush acronym, but it is one that investors will hear more often in the future. SRI investing is an investment discipline that considers Environmental, Social and Governance (ESG) criteria to generate long-term financial returns and a positive social impact.

There is a trend that SRI products are a growing proportion of the total managed money invested. However, SRI investing is not a new philosophy. It has gained prominence among new investors to the wealth management market, that blends investment returns with their social consciousness. There is no specific reason why this market has developed, however there could be several contributing factors. Society seems generally more aware of social and environmental issues, which has resulted in greater transparency and accountability. It is worth noting this has not necessarily been driven by government intervention. Diesel car emissions testing, plastic product usage and gender pay gap, to name a few, have all had media campaigns that have resulted in government support. This is not just restricted to social issues, but corporate governance failures, bribery and corruption cases have all received wider press coverage, leading to public demand for accountability.

Luke Tribe from our Research team explains sustainable, responsible and impact investment.
The investment industry has also developed its SRI products and practices to move away from one that initially invested in small thematic investment situations, such as clean energy projects. There is now a greater focus on how companies operate, make their profits and invest responsibly. This new approach is more likely to encompass larger capitalised companies, from household brands to everyday services. These businesses are likely to have developed a corporate and ethical ethos that is transparent and well positioned for sustainable growth. This has seen returns move more in line with traditional fund performance.

One of the requirements of the SRI following, has been greater reporting transparency. Analysts not only have to provide quantitative financial research but qualitative aspects that demonstrate good corporate governance and the environmental impact of their operations. One of the downsides to SRI investing is that there is no standard approach to conducting this analysis, so different investment houses have a different approach to the information they collect and the criteria for which constitutes an ethical investment. Whilst ‘Sin’ stocks like Tobacco, Armaments and Alcohol are generally excluded from the ethical investment universe, there is more inconsistent treatment of the commodities and utilities sector.

As a private investor, following one’s own principles is a good start, but it is important to keep the ethical criteria for investing simple. The higher the threshold to meet ESG criteria the smaller the universe there is to invest in. Knowing that different investment houses treat SRI investing in different ways means it is important to establish whether their research process is aligned to the client’s ethical stance.