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Demystifying responsible investing and sustainable investing

3 years ago

demystifying responsible investing
and sustainable investing

In recent years, issues around sustainability have become increasingly important for investors and the wider public. To meet this demand, a broad range of investment approaches has emerged, aiming to address these issues in different ways and to varying extents. Here we look at two of the most common approaches – responsible investing and sustainable investing – in more detail.

Helping investors to make informed choices

The wide variety of new investment approaches has created a problem – how do investors know which is right for them? Our latest research shows that many people simply aren’t familiar with the options. Only half of respondents recognised the term ‘sustainable investing’, dropping to one third of respondents for ‘responsible investing’ and ‘green investing’.

What are the options?

Some of the most common investment approaches are:

  • Ethical/exclusion investing – avoiding contentious sectors or industries, such as tobacco or weapons
  • Responsible investing – integrating the analysis of environmental, social and governance (ESG) factors in the investment process.
  • Sustainable investing – keeping a particular sustainability-related theme in mind.
  • Impact investing – choosing projects with a specific, positive environmental or social goal.

Responsible investing in focus

At Architas we believe in the benefits of responsible investing. This involves integrating the analysis of ESG factors in the investment process. ESG factors could include pollution, energy efficiency, relations with local communities, staff equality and working conditions.

Responsible investors look for any hidden risks or opportunities related to these issues. They combine this research with traditional financial measures, to evaluate investments and decide whether they should be included in the portfolio.

The difference between responsible investing and sustainable investing

Responsible and sustainable investing are the most well-known approaches across much of the investment world, and many people use these terms interchangeably. But there is an important distinction between the two.

Responsible investors will carry out ESG analysis on any variety of underlying investments, even those that could be considered unethical or unsustainable. Conversely, sustainable investors focus only on companies or industries that are contributing to a more sustainable future (or should benefit from it). They may focus on a particular theme, such as renewable energy, electric vehicles or carbon capture technology. Or they could analyse companies across all sectors, as long as they are compatible with the transition to a sustainable economy.

Responsible vs sustainable

The Architas approach

Architas is a signatory of the United Nations Principles for Responsible Investment, but as a multi-manager investor, our responsible investing approach is slightly different to many other firms. We analyse our underlying fund managers on their responsible investing credentials, and then use this information to determine if they should be held in our portfolios. Fund managers must meet a minimum score to be included, so investors can be confident they are investing in companies with positive responsible investment credentials.

For example, we look at fund managers’ policies and governance, how they examine ESG issues in their underlying investments, and how they report on their progress in this area. We are in the process of rating all our underlying funds on their responsible investing criteria, and we aim to have this completed by the end of 2021.

What investors want from ESG funds

Discover what investors expect from their ESG investments, from important reporting requirements to the main industries that should be excluded.  

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