Responsible investing: a guide to the dilemmas, jargon and key debates | The invested generation

There is a reason so many discussions about tackling the climate crisis have become discussions about finance, investments and pensions. The global effort to avert the most catastrophic effects of global heating is in one sense an emergency mission to reallocate financial resources. This has prompted a fundamental shift in the world of investing.

Your pension savings and other investments may well be supporting businesses that can make a big difference to the global climate effort – whether through their actions or their inaction. Likewise, those businesses are also key to addressing other social issues, such as growing inequality and a lack of diversity. Your money can influence the direction these companies take. After all, businesses are answerable to their shareholders and investors.

However, being a responsible investor is arguably very different from being a responsible consumer. When you swap out items in your shopping basket for more ethical or eco-friendly substitutes, you already know the difference between, say, laundry detergent and fabric conditioner.

The same might not apply to investing, particularly if you’re a novice. More importantly, unlike ethical consumerism, responsible investing isn’t always as straightforward as substituting items in your shopping basket for more sustainable alternatives. That’s because investors can exert influence on companies in different ways – and are therefore faced with different considerations and questions.

So, to make the world of responsible investing easier to navigate, we’ve produced an online guide exploring the issues, the dilemmas, the jargon and the watchouts. The aim is to help you to become as savvy at responsible investing as you are at responsible shopping.

Here’s an overview of some of the issues explored in the online guide:

The new language
A shift towards valuing companies against their impact on the planet and people, rather than valuing them solely against their profits, has introduced new words and acronyms to the world of investing.

For instance, investors and pension holders are paying increasing attention to how companies perform against so-called ESG criteria, which stands for environmental, social and governance. Other acronyms refer to different types of ESG targets, standards and disclosures. But there’s no need to be put off, thanks to our handy guide.

Guarding against greenwashing
Vague and imprecise language can leave room for misleading or unsubstantiated claims about a company’s climate credentials – otherwise known as greenwashing. For instance, what do words such as “green” and “eco” actually mean?

Corporate greenwashing can make it more difficult for people to make informed decisions. It also undermines genuine efforts by companies to clean up their acts and tackle the climate crisis. So, whether you’re a consumer or an investor, the ability to call out corporate greenwashing is fast becoming a key life skill. Our online guide therefore examines how investors can guard against it.

Diversity or engagement
This has become a key dilemma. Should responsible investors sell their stakes in companies that fall short on ethical or environmental issues, or should they instead retain their holdings and use their position as shareholders to influence those companies that need to do better? The debate is often couched as the “divestment versus engagement” dilemma, and there are strong feelings on either side.

One problem with diving is that there will likely be less-scrupulous investors out there happy to step in. “Ditching and switching” can therefore all too often entail offloading polluting operations to less-accountable or responsible owners. Divesting from heavily polluting companies can also make it harder for them to raise funds to finance their transition to cleaner ways of operating.

Retaining an investment means retaining a seat at the table, which allows investors to put pressure on boardrooms to change. This can often lead to more effective results. We explore why it’s useful to move beyond the divestment versus engagement dichotomy and instead view divestment as a threat of last resort that can strengthen shareholders’ position when engaging with companies.

The art of influencing
So how exactly can investors persuade a company to reduce its carbon footprint or tackle the mistreatment of workers in its supply chain? From gently nudging to headline-grabbing public confrontations, we explore how shareholders can put pressure on companies to step up.

Engagement can be undertaken by individual investors and pension holders, or by shareholder action groups. But it can carry even more weight when undertaken by asset managers who work for pension and investment firms. These asset managers invest and manage investment funds on behalf of individuals, pooling their resources, and so they typically control much larger stakes in each company they invest in.

Shareholder engagement can require a great deal of perseverance and expertise. In the online guide, we ask several asset managers how they go about it, and how their roles have changed as a result of the industry’s shift to more responsible investing.

scale and impact
It can be tempting to focus on smaller startups that offer exciting solutions to sustainability issues. They may well be deserving of investment, but it’s worth considering that while larger, more established companies may be less exciting, their actions can potentially be more impactful thanks to their market clout.

Shareholder engagement with them to accelerate their shift to greener, fairer ways of operating can often have an outsized impact on wider global efforts by dint of their scale and the size of their supply chains. Put simply, they have more room to improve. They may also have a greater imperative to do so, given that they will likely be more exposed to the financial fallout of the climate crisis, as well as to future regulations and the prospect of reputational damage.

This illustrates how, for businesses and investors alike, the financial case for responsible investment and the moral case have become increasingly linked.

Learn more about responsible investing by heading to Royal London – The Invested Generation