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Why responsible investing matters

Covid-19 was a reminder that companies can’t ignore the broader context within which they operate.

Behaving responsibly is becoming a precondition for doing investment business in society, and responsible regulations and guidance will help to shape the 21st century investment world. In a few years’ time, we expect that almost all investing will be responsible and ESG-focused.

The biggest existential challenge for all of us is the environment. The world is facing dangerous long-term environmental problems, and investors have a role in helping humanity to deal with them.

Governments in many countries are stepping up to the challenge. In 2019, the UK adopted a net emissions target of zero by 2050. The EU began revamping its many ESG policies with the European Green Deal of January 2020, which aims to make Europe the first climate-neutral continent by 2050. The USA’s looming Green New Deal is likely to entail similar commitments. Last year China announced that it would be carbon-neutral by 2060.

Fortunately for investors, responsible investing tends to make business sense. There is evidence that incorporating ESG information in the investment process can improve the quality of decision-making and risk management. Most notably, good companies with high ESG ratings tend to be managed better, plan better for the future, make better use of technology and suffer from fewer surprises than their competitors.

ESG data on a company, for example, might reveal risks (e.g. vulnerability to extreme weather, stranded fossil fuel assets) that the usual financial data do not. In this sense, taking ESG into account when looking at companies, as required by the UK Stewardship Code and the UN Principles for Responsible Investment, is simply a sensible broadening of the investment process.

We note, of course, that ESG ratings are not static. A company or country that is genuinely trying to improve its ESG behaviour can be of great benefit to the world and can be a fine investment. We question our active managers about their holdings of stocks with poor ESG ratings and expect them to engage with companies and encourage them to improve their stewardship and ESG performance.

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