The responsible investment industry has evolved significantly over time. Today, responsible investing incorporates environmental, social and governance (ESG) analysis into the decision-making process such that investment objectives are managed alongside ethics or values. In this article, we lift the hood on responsible investing and explore how it can help investors make better informed investment decisions.
What is responsible investing?
Responsible investing considers a broad range of issues that may have a material impact on the risk and return characteristics of investments. These issues may be driven by existing or future regulations, reﬂect issues of signiﬁcant societal concern, or pose potential operational, ﬁnancial, strategic, reputational or systemic risks.
To invest responsibly, we consider a number of factors:
- Environmental: Natural resource use and degradation (e.g. water scarcity), waste, pollution, greenhouse gas emissions, climate change, clean technology products and services, environmental management practices.
- Social: Human capital, workplace health and safety, labour relations and standards, human rights, demographic changes, supply-chain and community impacts.
- Governance: Board composition and independence, executive remuneration and incentive plans, corporate accountability structures, compliance, negligence, bribery and corruption, conﬂicts of interest and related-party transactions, shareholder rights, accounting and audit quality.
What does this mean for investors?
In-depth analysis of these factors can identify mispriced securities and opportunities for outperformance for investors. While the direct earnings impact of individual ESG issues might be small, the way a company deals with its ESG issues can often tell investors something about the quality of management.
In equity investments, drivers (which are not necessarily found in financial statements) such as a company’s culture, its occupational health and safety performance and its supply chain risk management can have a significant impact on share value. Therefore, by understanding the factors underpinning a company’s earnings, investors can make better informed investment decisions and assess the earnings sustainability of a company. If the business model relies on under-priced pollution, under-paid labour or weak regulation, the current earnings levels might not be sustainable.
There are links between an organisation’s environmental and social impacts, the quality of its corporate governance, and its long-term business success.
While many sustainability issues may be known to the market, the implications for investments can be complex. In-depth ESG analysis successfully integrated with financial analysis can provide investors with significant benefits, including:
- Better informed investment decisions
- Early identification of investment risks
- Identification of mispriced securities
- Potentially higher investment returns – both in the short and long term
To access a video on one of AMP Capital’s dedicated responsible investing solutions, please click here.
Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.