Responsible investing

 

Responsible investing: where to start – and the financial basics you need to understand 

If you want to make a difference with your money, it can be difficult to know where to begin if you’re not an expert. Our guide provides an overview of the key terms and principles, which should help you make sustainable investment decisions. 

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Responsible investing can feel a lot more daunting than responsible shopping. After all, when you decide to swap your weekly grocery shop with a basket of more eco-friendly substitutes, you already know the difference between, say, laundry detergent and fabric conditioner. Likewise, if you decide to buy an electric car, you’ll already know the difference between a hatchback and an SUV.

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But the same might not apply to investing – particularly if you’re a novice. So here are some basic nuts and bolts of investing to help you get started.

Equities

In essence, equity is ownership. When you buy shares in a company, you are buying a stake in that company. Most people will buy into public equities, which are shares publicly traded on a stock market. But it is possible to purchase private equity – a stake in a company that isn’t publicly traded. 

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If you’re not a high-net-worth individual or seasoned investor, however, you’re more likely to stick to shares in companies listed on a stock market. Indeed, most of us will have investments in equities already: “If you [invest] in an Isa or pension fund,” says Lee Coates, an independent consultant, “they’re almost certainly going to be in equities.”

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Bonds

Whereas buying shares means you effectively become a co-owner or shareholder of that company, purchasing bonds doesn’t give you such a privilege. Bonds are a type of loan, where a company or public body, such as the UK government, sets out to raise a certain amount of capital, and investors lend them the money for a set period of time. “So Facebook could say OK, we’re issuing a bond – we wish to raise £100m. And that bond will last three years, at the end of which we’ll pay the investors back their money, with an interest rate of x,” says Coates.

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UK government-issued bonds (called gilts, a reference to the gold-rimmed paper they were once printed on), are typically considered to be very low-risk. A company may go bust, but it’s fairly unlikely that a government will, says Coates. Rates of return on government bonds do tend to be relatively low, however, because they are considered less risky than company bonds.

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“The most famous government bonds were probably war bonds, to fund the first and second world wars,” Coates adds. “It was a way of supporting the war effort.” 

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Funds

A fund is a group of investments pooled into one product. A pension fund, for instance, could consist of several components, or “securities”: equities (shares), government or corporate bonds, or even property investments. It’s useful to think of funds as baskets of investments pooled together as one – with a common purpose of making you money.

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The managing of funds – deciding what stocks or bonds the fund should be composed of – can be done passively or actively. Passive funds track a stock market index or a sector of the market and are “run by a computer, essentially”, says Coates. They’re curated and then continuously tweaked by an algorithm. Active funds, on the other hand, are run by people – they have an appointed asset manager who is responsible for making decisions about what that fund invests in. 

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They essentially act as a steward for investors’ money. For example, the governed range of funds at the UK’s largest mutual life, pensions and investment company, Royal London, are fine-tuned on an ongoing basis by their investment experts.

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Green going mainstream?

One difference between bonds and equities is that bonds can sometimes be earmarked for specific projects – as in the case of the government bonds that were used to finance the war effort. As such, those types of bonds can give investors a clear idea about how their investment will be used. But whereas during wartime, investors in government bonds knew that their money was funding a specific government cause, today, people can put their cash towards another battle.

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As of 22 October, savers were able to purchase a green savings bond, issued by the UK government through NS&I, which will go towards funding renewable energy projects, sustainable transport infrastructure and programmes to combat pollution. “It’s exactly the same [as war bonds],” says Coates. “The government is saying, we have a war on here. It’s called climate change. And we need to raise money.”

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But that purpose-led approach to investments is also evident when it comes to equities, thanks to the growth of so-called responsible investment funds. These funds target investments that meet environmental, social and governance (ESG) criteria as well as more traditional financial criteria. 

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For instance, they might comprise shares in companies that meet high standards in terms of environmental and social sustainability – with progressive policies towards greenhouse gas emissions and renewable energy, employee welfare and corporate inclusivity.

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Those interested in prioritising these concerns could choose to invest in specific ESG funds – though be mindful to check that such funds do indeed match your own criteria and concerns.

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Another option is to choose an investment company that incorporates ESG criteria into all products, for instance by using its investment clout to pressure companies to abide by ESG principles. Royal London is one such firm, having committed to halving the carbon emissions of all its investments by 2030 and achieving net zero emissions by 2050. 

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Its Royal London Asset Management arm, which manages more than 90% of Royal London’s assets, stresses that when it comes to the companies it invests in, engagement on strategic, governance and environmental and social risk management issues forms a core part of its stewardship responsibilities. “It is an activity that many of our clients have come to expect from us as a long-term asset manager,” it states in a recent report. “Our ultimate goal is to have a positive influence on behaviour and assist the company in improving internal practices, governance and oversight, and their impact on society and the environment.” 

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Additionally, across the board, asset managers and companies that manage investment funds, including pensions, will in the next few years be required by law to disclose how they take sustainability into account. As per the government’s recently released Roadmap to Sustainable Investing, new disclosure rules along with sustainability reporting requirements, should help to empower investors and consumers alike to make decisions that align with their own values.

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The power of your pension

According to research from the Make My Money Matter campaign, ensuring your pension is suitably green could be the single most impactful action to reduce your carbon footprint. 

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It’s therefore worth finding a pension provider that places mitigation of the climate crisis at the heart of its investment decisions. And if you have a workplace pension, do enquire about the provider’s stance or rally your employer to choose a sustainability oriented firm.

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However, one other thing to be mindful of when it comes to investing is risk. Everyone has a slightly different attitude towards risk, so it’s important that you and your financial adviser, if you have one, assess your appetite for it, before you make any financial decisions.