Financial planning is an industry that tries to make the complicated more simple but I always tend to find that it fails to do that in the realm of investing sustainably. In writing this article I had to consider what to put in my title: green, ethical, sustainable, responsible, socially responsible, ESG, impact, thematic… the list goes on! How then can we go about breaking down the differences to make it easier for everyone to understand and more importantly: to provide solutions in line with people’s views.
Hopefully in this article we can understand what some key differences are in the most commonly used terms and realise it is not just all about the environment, it is much wider and much deeper.
Negative vs Positive Screening
Negative screening is exactly what it sounds like. It’s the process of screening out (by not investing in) things that are seen as ‘negative’. It’s one of the oldest and most traditional ways of investing in this space and is still common today. You can exclude anything from tobacco, alcohol or weapons to things like pornography or gambling. The idea is that these more ‘sinful’ industries should be avoided at all costs. Very simple.
So what is positive screening? It’s not what you might think. It doesn’t just invest in ‘positive’ companies, it is more nuanced than that. I like to think of it as trying to fix problems where negative screening would avoid them. It isn’t just about investing in the best companies but it could be about picking those that might be the best in their sector or provide a solution to one of life’s problems. I’ll provide an example. Alphabet (Google) is often included in these portfolios because the large majority of their business is the search function. Or if you think of it another way: providing knowledge – on anything, to anyone at any time. Gone are the days when only the most wealthy or academic had huge libraries and encyclopedias, nowadays anyone with an internet connection can get the information they need. One of the key aspects of this type of investing is engaging with the companies directly and helping them make better choices for the future. This could be board independence, gender diversity, remuneration transparency or setting targets to reduce carbon emissions.
Ethical, ESG, sustainable??
So how does this translate into funds? Well Ethical is the simple one here – broadly ethical investing tends to follow the more traditional negative screening policies. They tend to avoid the companies they do not want to invest in with set rules in place. Each fund will be invested differently but the goal is the same.
ESG or Environmental, Social Governance is more of a framework of factors to look at when choosing which companies to invest in. Environmental is the one most clients are most interested in – reducing emissions, cutting single use plastic & recycling has seen a huge boost in popularity. Social factors all centre around people: paying living wage, health and safety at work and looking at your supply chain can all be examples of social issues. Governance looks at how companies are run. Funds that use this type of framework tend to have sustainable or responsible in their name and they can have very different mandates. Most use a type of positive screening and will specialise in certain areas. These fund managers often have a way of providing scores for companies. They will be looking to try and help companies improve their scores by engaging with them and working with them on an ongoing basis. This isn’t an area where they just buy low and sell high, they tend to be in it for the long haul which means the companies know they are committed to helping them improve and ultimately be more profitable.
Hopefully this has helped clear up some of the most widely used terms in this fast growing area. As you can see it’s much more complex than it first seems but it is something that we are able to help you navigate, to get the best investment outcome in line with your goals and views.
If you have any questions, please do not hesitate to contact a member of the Buckingham Gate Team.
Blog post written by Mel Abplanalp, Paraplanner, Buckingham Gate.