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Five common responsible investing myths debunked

With COP26 having been in the news during November, issues such as climate change have once again been leading the headlines as world leaders discuss their plans on how and when to reach a ‘net zero’ economy.

As we all become increasingly aware of environmental and societal issues, investors continue to consider how they can use their money to improve the state of our planet.

Interest in responsible investing has been growing exponentially over recent years, however there are still a number of misconceptions out there which prevent some investors from exploring this area further.

In this article, Louisiana Salge, Senior Sustainability Specialist at EQ Investors, debunks some of the most common myths.

"Misconception 1: All responsible investment approaches are the same
There are a variety of ways in which responsible considerations can influence investment mandates and portfolio management. To summarise the three most common approaches:

  • Ethical investing focuses on excluding a set of industries or companies based on controversial behaviour, such as tobacco, alcohol, or pornography. 
  • Environmental, Social and Governance (ESG) investing introduces information on how well companies manage relevant operational ESG factors into the investment decision-making. 
  • Impact investing focuses on creating material, measurable positive impacts on people & planet by targeting sustainable themes like clean water, renewable energy or accessible healthcare. This approach puts a very strong emphasis on companies’ products and services and the solutions they bring to the many challenges we face.
     

Misconception 2: Responsible investing will sacrifice investment returns
There is mounting evidence that responsible investing does not sacrifice performance, in fact, incorporating ESG factors into investments can help boost financial performance. Overall, businesses that demonstrate greater operational sustainability (ESG) and sustainable products & services, can perform better.

The reasoning is that businesses managing E, S & G better than peers demonstrate better risk control and compliance and suffer fewer severe incidents. Additionally, ESG leaders invest more in Research & Development, foresee future risks and plan ahead to remain competitive.

Impactful companies are those that have turned the largest societal challenges into profitable business opportunities. These companies benefit from the growing global demands for their products and services, greater regulatory support and from avoiding reputational risks.

Misconception 3: Responsible investing is too risky
It is true that many high-impact investments can be in more volatile markets (such as emerging markets), but real opportunities exist across all asset classes, from small to large companies located in the US, in the UK and all regions of the world – and risks vary between these.

For example, social housing investments can provide reliable government backed income streams while providing significant societal benefits. Water utilities prevent industrial wastewater from polluting natural ecosystems and provide defensive investment characteristics.

Therefore, portfolio managers can create portfolios for different ‘risk appetites’ of investors.

However, investors should be aware past performance is not a guide to future performance and that the value of investments and any income derived from them may go down as well as up and they may get back less than was invested.

Misconception 4: It is a narrow investment universe
There is no single defined investment universe for responsible investors. Rather, the amount of companies eligible for investment can depend on the impact or ESG standards set by investors.

While this means that we cannot give a reliable responsible universe estimate, opportunities are larger than some might assume. For example, the EQ Positive Impact Balanced Portfolio has exposure to about 1,000 unique companies and organisations globally.

This universe is also expanding. As much as investor interests are turning to sustainability, companies’ business models are too.

Misconception 5: Responsible investing cannot actually make a positive impact
When investing through traditionally managed portfolios, disregarding the impact of investments on people and planet can contribute to business activity that actively works against an investor’s values.

On the other hand, investing through a positive impact mandate can mean that the output of companies can align with the client’s values.

Additionally, responsible investors can use their company relationships to engage boards on any sustainability weaknesses and thus create change. They are also able to use voting rights to back or block strategic decisions that concern the company’s ESG performance.”
Louisana Salge – EQ Investors

If you would like to know more about responsible investing and how this could be incorporated within your portfolio, please feel free to contact your financial planner today.