What is responsible investment?
Responsible investment means considering a wider range of factors that could affect the long-term value of your pension savings. This includes issues such as climate change, how companies treat their employees and customers, and how well businesses are managed.
Environmental, social and governance (ESG)
These factors are often grouped under the term ESG, which stands for Environmental, Social and Governance. ESG factors can influence a company's long-term performance and the value of investments. By considering these factors alongside traditional financial information, investment managers can gain a more complete picture of the risks and opportunities that could affect a company's long-term performance.
Environmental factors
Issues related to nature and the environment. Examples include how a company manages carbon emissions, its use of natural resources and pollution and waste management. Companies that manage environmental risks effectively may be better prepared for future regulations and changing customer expectations.
Social factors
Issues related to people and the community. Examples include employee wellbeing and safety, human rights in supply chains and customer treatment and data security. Poor treatment of employees or customers can damage a company's reputation and profitability.
Governance factors
Issues related to how a company makes decisions and is managed. Examples include board oversight, executive pay and business transparency. Strong leadership and governance processes can reassure that companies are managing long-term risks effectively.
Types of responsible investment approaches
There are different ways investment managers can take ESG factors into account. Here are some of the approaches you may see referred to in investment literature.
Considering environmental, social and governance factors alongside financial information when making investment decisions.
Investing which avoids or limits investment in certain companies or sectors based on agreed criteria e.g tobacco or weapons.
Investing more in companies that score well on ESG factors and less in companies that score poorly.
Investing in companies or projects that aim to deliver positive social or environmental outcomes alongside financial returns.
Investing in companies linked to a specific theme, such as renewable energy or healthcare.
How investment managers use activities such as voting at shareholder meetings and engaging with companies to encourage good practices and support long-term value creation.
Understanding climate-related investment terms
Climate change is a long-term global challenge that can create both risks and opportunities for investors. The definitions below explain some of the key climate-related terms used across the investment industry.
Long-term changes in the Earth's climate, mainly caused by greenhouse gases building up in the atmosphere.
The total greenhouse gas emissions associated with a company or investment.
The process of reducing greenhouse gas emissions over time.
A goal to reduce greenhouse gas emissions as much as possible and balance any remaining emissions by removing them from the atmosphere.
Products, services and technologies that help address climate change, such as renewable energy, electric vehicles and energy-efficient buildings.
Categories used to measure greenhouse gas emissions. Scope 1 relates to a company's own operations, Scope 2 to the energy it buys and uses, and Scope 3 to emissions from its supply chain and the use of its products and services.
The value of an investment can fall as well as rise and isn’t guaranteed. The value when you come to take benefits may be less than has been paid in. Responsible investment and the consideration of ESG factors doesn’t guarantee enhanced returns.
