Changing the world with investments

Over the past few years, many more people have been making changes in their day to day lives to try and make a small difference in the world.

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Kate Capocci
Published: 02 Dec 2020 Updated: 13 Apr 2023

How you can make a difference with your savings

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Over the past few years, many more people have been making changes in their day to day lives to try and make a small difference in the world. Maybe you take a reusable cup to the coffee shop, try to reduce your consumption of fast fashion or take fewer car journeys. Maybe your contribution is volunteering in the local community or donating to charity.

One effective change that should not be overlooked is the difference we can make with our savings and investments. Responsible investing is a more holistic approach to investment, which aims not simply to make a profit, but also to bring in an analysis of environmental, social and governance (ESG) factors to look at how these factors might impact the valuation of an investment, perhaps through the extra cost of dealing with high carbon emissions or lower revenue growth as people switch to more sustainable products. Different approaches can be tailored to your own set of values, whether you are more interested in decarbonisation or social impact.

There are some interesting benefits to aligning your investments with your values, on both an overall impact and a personal level.

Cumulative effect

According to a study by Morgan Stanley, 85% of the population are now interested in sustainable investing, up 10% from five years ago. This rose to 95% for 18 to 37-year olds . It is clear there is an ever-growing pot of personal wealth that is being earmarked for those companies with more sustainable practices: investors and companies are taking note. We are already seeing changes to what is considered good practice. Even the major oil companies are now committing to net carbon zero targets, which would have been unimaginable a decade ago.

With each pound of savings that goes towards responsible investment, the cumulative pressure on corporations to improve their environmental and social policies increases.

And each additional share held by asset managers on behalf of clients gives them greater traction for voting and engagement. This is where investors can really communicate with companies on the changes they want to see.

Better returns

There is also growing evidence that incorporating ESG criteria may generate better risk-adjusted returns . There are a number of reasons why this may be the case: the most widely accepted is that ESG analysis, which covers a number of elements including climate change, resource scarcity, labour relations, cyber security, shareholder rights and board transparency, recognises non-financial factors could have a significant impact on the long-term financial performance of a company. By considering these factors, investors are more likely to avoid controversy while also making sure that they are invested in companies with good governance, risk controls and that think about the future.

At Smith & Williamson we created, using a set of quantitative tools and qualitative assessments, a list of responsible companies. These companies have positive products or services, have good relations with all stakeholders and strong management. Perhaps surprisingly, this condensed list includes an airline, oil and gas companies and mining companies, reflecting improving business practices and sustainability.

This list outperformed our wider monitored universe by over 40% in the year to 30 September 2020 .

In this period, it really has paid to be responsible.

What are the key issues that matter to you?

Responsible investment is varied in its styles and approaches. The broadest approach seeks to find companies that perform favourably using ESG metrics. Accordingly, no one issue or theme is targeted. More tailored and specific approaches can be adopted, and many clients have several specific topics in mind when thinking about sustainability.

Unfortunately, this is where an approach to responsible investment can become a little more complicated. Not all goals are compatible with one another. And many more cannot be viewed in black and white.

For example, many investors look at Alphabet (parent company of Google), which improves access to education. This has come into greater view over the pandemic, with many schools using the free Google Classroom application to deliver online classes. Additionally, the classic Google Search goes a long way in the democratisation of information and education. Knowledge is no longer just a privilege for the wealthy and academic elite. With access to a device and Wi-Fi, you can read up on almost any subject.

But with this comes the negatives of a mammoth US technology company with an unprecedented monopoly on internet usage, or in the words of the US Department for Justice: “Google is now the unchallenged gateway to the internet for billions of users worldwide” . The key issues surrounding Alphabet are those of data collection and privacy, tax avoidance and antitrust – though there are undoubtedly many more.

All this is not to discourage would-be responsible investors, but to encourage them to explore the key issues that they would want to address and consider the best way this could be achieved. In many cases, companies that are positive in some areas are inadvertently negative in others. And sometimes avoiding negative areas in the market is not the best solution.

See more here:

Finds a wealth manager that votes

The best way to ensure that your money is being used well, is to ensure your manager votes. Using active ownership to influence positive changes is one of the best ways to encourage change.

Given the short-term nature of stock markets, the time and money companies need to transition to a more responsible approach can impact the next set of quarterly results. Voting and engagement ensure management understand that investors want positive action and can highlight their shareholders’ specific ESG expectations. It also allows investors to understand the challenges and opportunities a company faces and better shape their expectations. So, when you are considering what more you can do to make a difference in the world, maybe consider how your savings are invested. It could prove to be the biggest change of all.

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Capital at risk. The value of investments and the income from them may go down as well as up and investors may not get back the original amount invested. Past performance is not a guide to future performance. Further information is available in the Key Investor Information Document (KIID), the risk section of the Fund’s prospectus and the Fund Factsheet. Please read the KIID before making any investment decision.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Smith & Williamson Investment Management LLP
Authorised and regulated by the Financial Conduct Authority.
Registered in England No. OC 369632. FRN: 580531
Smith & Williamson Investment Management LLP is part of the Tilney Smith & Williamson group.
© Tilney Smith & Williamson Limited 2021

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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.