Sustainable investing should be about process, not product

You see many advertorials on increasingly fashionable topics such as ESG, ethical, impact, or climate change. But which are muddled, which are marketing, and which are authentic?

At Barclays, our position between product managers and charities gives us a unique perspective. We hear both what is on offer and what clients want to achieve. Without a common and clear language, communicating effectively is difficult. Our clients look to us to cut through some of the jargon and hype to understand how they can invest.

One manager’s ethical, is another’s sustainable, is another’s ESG

Foremost, ignore the labels and language you’re pitched by product providers. One manager’s ethical, is another’s sustainable, is another’s ESG. Instead, focus on the intention and actions of the investment process. When examining this, we see three distinct approaches that have emerged over time – ethical, responsible, and impact. We suggest these should be “investment approaches” as opposed to product labels, because they can be used separately or in conjunction.

The intention of ethical investing, the oldest approach, is to apply a set of pre-determined values or beliefs to guide what’s acceptable to be included in your portfolio. In practice, this usually involves writing a list of sectors or companies and (negatively) screening them to avoid holding them.

Responsible investing shifts the intention from personal to financial. The aim is to improve investment decisions by assessing how effectively an organisation operates. This means adding non-financial information into the investment process, organised into environmental, social, governance categories. The approach also expects owners to be actively engaged with an investee company to try to influence their practices.

The most important starting point is your charity’s mission and investment objectives

Most recently, impact investing has brought in a more holistic view about all the outcomes organisations generate. While an ESG assessment can provide insight into how well an organisation is run, it also realises that the impact of goods and services matter too. Moreover, it recognises that the personal and financial motivations of investors can be blended.

The fossil fuel industry helps illustrate the implications of the different approaches to investing. Taking an ethical approach would mean deciding where to draw the line between acceptable and unacceptable companies. For example, at thermal coal producers, supermajors, or the entire industry?

With responsible investing an investor would look to select companies better placed than their peers at managing the industry risks, if they accepted the overall risks of the sector. Finally, with an impact investing approach a decision would be based on overall attractiveness of financial and societal outcomes of the sector and company. This would include considering the investment and revenue which some fossil fuel companies are now making in renewables.

Low carbon portfolios; which are best?

A product manager could use any of these approaches to offer you a “low carbon” portfolio. But which is the best? Irrespective of what a manager promotes, the answer is, it depends. All of these approaches have credible rationale; as well as pros and cons. However, the most important starting point is your charity’s mission and investment objectives – both financial and sustainable ones.

Your investment policy should enshrine these views. But frequently we find with new clients it has been some time since the last review. Or it doesn’t articulate these objectives to guide portfolio construction or manager selection in this new world of sustainable investing. Without agreement around your charity’s objectives, it is more difficult to determine which approach(es) can deliver them.

The investment policy serves as a reference to challenge and ask more questions of current and potential managers. It provides a lens through which to read the articles. It stands in defence of potential reputational risks. It helps you build a portfolio for both financial and sustainability aims.

Knowing where you want to go, gives you the best chance of getting there

In the end, knowing where you want to go, gives you the best chance of getting there. We always appreciate the opportunity to discuss your charity’s ambitions and how to achieve them.