A millennial’s guide to responsible investing

It’s no secret I favour responsible and sustainable investing. But with so much jargon and abbreviations it can be hard to understand exactly what’s what amongst all the different options: from ESG to SRI, CO2 to SDGs, the terminology can be a bit overwhelming – not to mention OTT.

So, with the help of Pictet Asset Management, I’ve put together this 60 second guide to the different styles of responsible investing.

‘The greatest threat to our planet is the belief that someone else will save it.’ – Robert Swan, Author

Four types of sustainable investments

Broadly speaking, there are four different approaches to sustainable investing: screening, stewardship, integration and thematic.

  1. Screening

    The oldest and best-known form of ethical investing is screening – or the avoidance of potentially controversial products: sin stocks like oil companies, gambling firms and weapons manufacturers.

    One example of this approach is Rathbone Ethical Bond. The fund has a high income target and ethical exclusions are simple: no mining, no arms, no gambling, no pornography, no animal testing, no nuclear power, no alcohol and no tobacco. In an interview last year, manager Bryn Jones shared both the funds negative and positive screening process.

    EdenTree Amity UK also applies a simple and pragmatic ethical screen to its stock selection process, starting first with a negative screen, before looking at a positive screen to make sure companies have good practices.

  2. Stewardship

    Stewardship refers to the extent to which managers engage with the companies they invest in to drive change. Engagement with companies is an increasingly large part of sustainable fund management according to Jamie Jenkins, manager of BMO Responsible Global Equity, who said in a recent interview that companies now look towards them as consultants.

    Another excellent example of engagement is Rathbone Greenbank Investments, the sustainable research arm behind both Rathbone Ethical Bond and Elite Radar Rathbone Global Sustainability. We caught up with the manager of the latter, David Harrison, to find out more about how the relationship between himself and Rathbone Greenbank Investments works in practice.


  3. Integration

    That brings us to integration. Integration means that ESG factors are considered in the decision-making process and the investment analysis. It’s not about excluding companies, or screening, but being aware of their sustainable characteristics. All of our Elite Rated ethical funds have a degree of integration in their process, it’s what makes them responsible.

    However, one that stands out is Liontrust Monthly Income Bond. Not having the word ‘ethical’ or ‘sustainable’ in the name it can slip through the cracks for many when researching where to invest, but the fund managers use an integrated sustainability matrix as part of their investment process, to assess a company’s ESG credentials. They gave us some examples when we last caught up with them.

    And in a recent podcast with EdenTree’s Head of Responsible Investment Policy and Research, Neville White, we asked Neville how the research team gets the information back to fund managers when making stock decisions.

  4. Thematic

    The fourth type is more direct. These are funds that invest specifically in sustainability related themes, such as low carbon, clean energy or water. An excellent example of an out-and-out thematic fund is Elite Rated Pictet Global Environmental Opportunities. All companies within this portfolio must operate within a ‘safe operating space’ for each of the nine environmental challenges identified within the planetary boundaries framework. Fund manager Luciano Diana, explains the framework – and why they chose to use it as part of the investment process – in our recent podcast.

    Additionally, ASI UK Ethical Equity uses an annual survey of its investors to make sure it is targeting the themes and concerns of its investors within the fund. We This is coupled with manager Lesley Duncan’s ‘no compromise’ ethical screen, and ASI’s investment analysis work, when looking for ideas. We heard more about this when talking to Eva Cairns at the company’s climate change conference.

Mixing and matching

Many funds use a mixture of the four approaches above, and more and more generalist or mainstream funds are also incorporating some of these elements in their investment processes today. Thankfully, while we are investing to protect the future of our ourselves and our families, more fund managers and companies are thinking about how their choices are impacting that future too.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.