Q&A: What is responsible investment and why is interest growing?
Q: How do you define responsible investment?
The meaning of responsible investment has evolved over time. Originally, responsible investment meant excluding some companies from your investment universe, according to pre-set criteria, but this has changed.
At the highest level, I find it helpful to ask: what does it mean to invest irresponsibly? If you invest without careful analysis; if you invest without taking all material risks into account; if you invest without considering the wider implications; if you invest without focusing on achieving your, or your client’s, stated objectives – then you are investing irresponsibly.
This clarifies for me what responsible investment is. It’s about investing in a way which takes all risks into account, for both the short and long term.
This means that we can understand what responsible investment is not. It does not mean simply avoiding certain investments, or divesting from particular sectors or issuers, though it may involve doing so. Nor does responsible investment mean sacrificing performance. In fact, we believe investing responsibly over the long term has the potential to increase the likelihood of achieving your objectives.
When you look at responsible investment in this way, it is clear that it is not a niche approach relevant to only a few investors or just part of your portfolio. Nor does it clash with investors’ fiduciary duty. The right way to invest for the long term is to invest responsibly.
Q: Interest in responsible investment seems to be growing. Why? What’s driving the change?
Since Insight was formed in 2002, we have committed to responsible investment across our business and in recent years we have seen a marked increase in client demand. This is encouraging us to keep pioneering new approaches, and it’s also encouraging the wider investment management industry to demonstrate that they follow a responsible approach.
Regulatory change is also encouraging a shift towards demonstrable progress on relevant issues. A notable example is the French Energy Transition Law, which came into force in 2016 – it requires institutional investors to report on how they take ESG risks into account, and more specifically, climate risks. More broadly, there is a growing recognition that taking a responsible approach leads to better long-term outcomes for investors.
ESG issues are clearly material: we need to identify, assess and manage them, and this is not just about investment analysis but about engagement. Our clients expect us to be active owners. In many ways, equity investors are ahead of fixed income investors – the ability of equity investors to vote means they bear a specific responsibility with regard to how companies operate, and they can have a direct say in matters that affect long-term performance. But fixed income investors have become increasingly aware of the influence they can have. Companies need finance, and in that context, bondholders’ engagement with issuers is important. They can play an important role in encouraging companies to better manage their ESG-related risks and opportunities, as our experience demonstrates.
**The PRI, launched in 2006, is an independent organization that works to understand the investment implications of ESG factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. More details are available at www.unpri.org/. Signatories to the PRI pay an annual fee. They are required to report annually on their responsible investment activities and they receive ratings based on their reported data. Full details of PRI reporting and assessment methodology are available at www.unpri.org/signatories/signatory-accountability/about-pri-reporting. In 2017, Insight was awarded an A+ rating for strategy, governance and the integration of responsible investment-related issues across corporate bond portfolios, plus an A rating for the integration of responsible investment-related issues across securitized asset portfolios. When it submitted data in 2017, Insight did not have a formal ESG integration process for the fixed income sovereign, supranational and agency (SSA) debt category and was in the process of developing a more formal process. Full details of Insight’s ratings are available at https://www.insightinvestment.com/na/responsible-investment/pri-rating/.
Insight North America LLC (INA) is a registered investment adviser under the Investment Advisers Act of 1940 and regulated by the US Securities and Exchange Commission. INA is part of “Insight” or “Insight Investment”, the corporate brand for certain asset management companies operated by Insight Investment Management Limited including, among others, Insight Investment Management (Global) Limited and Insight Investment International Limited. Insight’s assets under management are represented by the value of cash securities and other economic exposures, and are calculated on a gross notional basis. Advisory services referenced herein are available in the US only through INA.
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