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:

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.

Final thoughts

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:

To access a video on one of AMP Capital’s dedicated responsible investing solutions, please click here.

About the Author

Sally Boone, Senior Portfolio Manager, Multi-Asset Group, responsible for the Responsible Investment Leaders diversified funds.

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