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