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.