How ESG integration can help manage risk

In simple terms, ESG analysis can help indicate a company’s overall health and quality.

Investment managers will look at the actions a company takes (or doesn’t take) in the three ESG areas to see if there are potential issues on the horizon. This can help managers spot problems missed by more traditional risk analysis – and to better value what they’re investing in.

Environmental

a company’s impact on land, sea, air, wildlife, plant life and the climate

Managers might analyse a company's waste disposal, how much energy they use, land development and carbon footprint.

Social

a company’s relationship with people; its employees, suppliers and the communities in which they operate

A manager is likely to consider a company’s approach to human rights, labour practices, supply chain issues and local communities.

Governance

the issues that affect or could affect the successful management and processes of a company

Managers may look at executive leadership, remuneration and strategy setting, operational and financial due diligence.

Remember, ESG analysis helps uncover risks and opportunities affecting returns to investors. So ESG is important to all investors – not just ‘ethical’ investors.

Stewardship – influencing positive change

Stewardship plays an important role in responsible investment. As steward of an investment, an investment manager can actively engage with companies they invest in to influence better policies or conduct on ESG issues. This has the potential to promote the long-term success of the company, benefit its investors and ultimately the economy as a whole. The visual below summarises how investment managers influence positive change.

Active engagement

Investment managers regularly talk to the management of the companies they invest in to better understand their strategy, performance, risk, capital structure and corporate governance.

It helps them to spot both opportunities and risks, as well as to:

  • influence positive corporate behaviour
  • encourage better sustainability, resource efficiency and involvement with society

Proxy voting

Investment managers also use voting rights to influence change.

They cast votes on behalf of investors on matters such as good governance, climate change, tax practices, labour standards, diversity, bribery and corruption.

Funds that use responsible investment screens and themes

Clients can choose from a wide range of funds that aim to achieve a financial return alongside a specific ethical, environmental or social outcome. These types of funds are often described as using ‘screening’ or ‘thematic’ approaches.

Screening

‘Screening in or out’ certain investments. For instance, avoiding negative investments such as tobacco, weapons or animal testing, and/or searching out positive investments, such as cleaner energy or sustainable transport.

This includes ethical funds.

Thematic

Investing in companies with the explicit intention of addressing a social or environmental issue. For instance, affordable housing, renewable energy solutions or sustainable transport.

This includes impact funds.

The broad types of funds are below. While some funds will clearly apply screening, or follow a theme, others will use a mix of these approaches depending on their objective.

  • Ethical funds
    These tend to avoid investing in companies connected to activities like weapons, animal testing and tobacco (negative screening) or look for companies which contribute positively to the environment and society (positive screening). Some funds will use a combination of negative and positive criteria.
  • Impact funds
    Invest in companies intending to make a positive – and measurable – contribution to the environment or society. These companies solve problems through products, services and business operations, for example, renewable energy, affordable housing and accessible education.
  • Sustainable/socially responsible investing (SRI) funds
    Invest in sustainable companies which balance their business interests with the effect they have on the environment and the community.
  • Faith-based funds
    Invest according to certain religious principles or laws. An example is Shariah investing, which aligns its investment principles with Islamic law.

Responsible investment options on Wrap and Elevate

We offer a choice of responsible investment options from leading managers on our platforms. These range from options which use screening and thematic approaches to options which use full ESG integration.

Already an existing Standard Life Wrap or Elevate user? Please contact your Standard Life contact to find out more.

If you don't have a contact or don’t currently use one of our platforms, please call us on 0345 272 6622 or email us at sales_support@standardlife.com

You can also find out more about our Wrap and Elevate platforms online:

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Find out more about investing responsibly

Blogs for advisers

A guide to impact funds

The distinct difference between ESG integrating and ‘all things sustainable’

Find out more about responsible investment on our customer website standardlife.co.uk