5 reasons responsible investing is good for your employees
Investing for environmental, social and governance reasons creates a feel-good factor around your business as well as your people.
By allowing your employees to invest in funds that respect the rights of workers, the concerns of consumers and the future of the planet we all share, you’re helping them make a difference.
In the early years, ethical and SRI investing was viewed with scepticism. Now, consideration of ESG issues is increasingly a mainstream part of investing and one that’s set to grow further as people wake up to the importance of looking after our planet better.
As the government encourages more people to put money into a pension, more of your employees are likely to start looking into exactly how their money is invested. Here are a few reasons why it’s good to give your workforce some investment options:
1. It dovetails with personal values and concerns
People are beginning to apply their personal values and concerns to the way they use their money. Many donate money to issues they care about and make different choices when they shop, guided by environmental, social and governance (ESG) considerations and personal ethics.
And if they’re doing that for small value purchases, why wouldn’t they want to do the same when it comes to investing money in their pension?
For many people, the money they put into their pension may be the largest lump sum they ever save. In the UK alone, it’s estimated that £19 billion is invested in ethical funds . That kind of money can make a powerful difference in the world.
With ESG funds, your employees know that whilst investing across all sectors, fund managers are considering factors that go beyond the next quarter’s financial results. With ethical funds, your employees can be sure they’re investing in companies making an overtly positive long-term impact rather than harmful activities like the tobacco industry, weapons manufacturers or adult entertainment.
As an employer with corporate values, offering the option of ESG based and ethical funds could help you both attract and retain staff, as people increasingly choose to work for companies that have similar values to their own.
2. Taking a responsible stance doesn’t mean sacrificing performance or returns
Back in the day, investing in ethical/SRI funds meant investing in companies trialling new methods of doing things. This was often a risky and possibly unprofitable business, but things have changed.
These days choosing investments that focus on environmental, social and governance (ESG) issues means the fund managers can invest in any company with high standards in those areas. This doesn’t just mean companies building electric cars or making beeswax wrapping. It’s also about investing in companies with a good social and environmental practices, across a wide range of sectors.
Now, fund managers have a wider choice of stocks to invest in, so they can spread the risk by investing in a variety of companies, from multinationals to small businesses. This can help boost returns and reduce the ups and downs the fund encounters.
However, ESG funds do invest in companies using new, innovative technologies or in developing markets or sectors. This creates some uncertainty and risk, but it also creates the potential for higher returns.
At the same time, governments are beginning to understand the potential for private investors to drive new investment in important sectors of the economy. This can include small and medium firms, housing, green energy projects and other infrastructure, which delivers the sustainable employment, communities and environments which all of us want to enjoy. Indeed, from October 2019, pension scheme trustees will be required to set out their policies for taking ESG issues into account. They will also have to advise whether they consider the ethical views of members in relation to their investment strategy.
3. You can be sure you’re only investing in companies working for the good
To focus investments in companies with high ethical standards, fund managers use negative screening and positive screening.
Usually negative screening automatically excludes controversial industries like weapons, tobacco, alcohol, gambling, adult entertainment, civil firearms, and fossil fuels. It could also cover other issues like deforestation, animal testing, genetic engineering, intensive farming and nuclear power, plus organisations with poor records on employment or human rights and/or working under oppressive regimes.
These exclusions cover many of the concerns of the average investor. However, ethical funds can also use positive screening to find and invest in companies with excellent track records in ESG practices. Fund managers examine things like the proportion of women and minorities a company employs, whether they pay the UK living wage, energy efficiency and transparency on tax and business practices. They also look at its relationships with stakeholders and shareholders.
Positive screening allows ethical funds to invest in companies working to find solutions to social, ethical or environmental problems. It can be a way of offering funding to companies with a strong ethical ethos or social purpose which might otherwise struggle to find investors.
4. Ethical funds actively work to change things for the better
Responsible fund managers with both active and passive holdings (ESG tilted index tracking funds) don’t just invest and move on. They constantly assess the fund’s holdings, monitoring them to make sure they don’t fall below the standards the fund expects.
They do this is by engaging with companies and using their voting rights as shareholders. A fund with a significant number of shares in a company can pressure that company to work to higher ESG standards and even influence strategy at board level.
And it’s in the company’s interest to make sure it continues to meet the fund’s standards. If the company falls below the fund’s ESG standards, the fund manager may withdraw the investment, meaning there are financial consequences for companies who drop their standards.
5. It supports UN Sustainable Development Goals
Ethical investing supports the 17 Sustainable Development Goals (SDGs) adopted by the UN in 2015, helping to make these goals more achievable. Ethical funds focus on investing in companies that support these goals, whether they explicitly state that or not. For example, an ethical fund will invest in a company building wind turbines for clean energy (SDG 7) but not a company producing chemical and biological weapons (SDG 16).
With ethical investment, the fund managers actively seek out companies that consider ESG issues as part and parcel of their strategy and processes. With more and more money going into ethical funds, the opportunities for companies taking an ethical stance increases, which in turn will lead to more companies adopting long-term sustainable business plans.
Ethical investing is a practical and responsible way to create a better future
The days where ethical investing was a niche proposition for a select few are long gone. Now, it’s a real chance for people like your employees to make a real difference in the world.
In offering ethical investing through your pension scheme, you’re empowering your employees to help create a future for the next generation. With this simple move, you’re doing good by your people, your business and the planet.