by Salman Ahmed
There are some strong opinions about responsible investing. In our experience, these are often rooted in an incomplete understanding of the different approach investors can use to invest responsibly. In this blog I’ll attempt to dispel some of the most common misconceptions.
Myth: Investing responsibly means lower returns
Dozens of academic studies have been dedicated to this topic. Overall, these studies have shown that responsible investing funds do not sacrifice returns. There also appears to be a benefit – the funds tend to exhibit lower down-side risk. Though it’s hard to pinpoint exactly why, researchers suggest it’s because companies that rank better on environmental, social and governance (ESG) metrics find it easier to raise capital. This is advantageous in times of economic stress.
Myth: Responsible investing focuses on climate change
Responsible investing covers a wide range of topics, and yes climate change is one. However, ESG also covers data security, selling practices, supply chain management, governance structures and more.
A fund’s focus depends on the responsible investing approach it follows. Of the three main approaches, SRI and impact funds might focus on climate change. Managers like Steadyhand follow a third approach: ESG-integration. With this method, managers concentrate on those issues most relevant to the company they’re researching. Relevant is a key word here. Not all businesses will be exposed to the same issues. For example, the ecological impacts of a gold miner warrant more scrutiny than those of an advertising company.
Myth: Responsible investment funds exclude all controversial companies
Some responsible investing funds exclude companies and industries they believe to be controversial. But most funds follow the ESG-integration approach. This approach doesn’t preclude managers from owning controversial companies if they conclude the return potential outweighs the risks (Steadyhand doesn’t have restrictions on the industries our funds can invest in).
Myth: It’s a fad
No doubt, there has been a wave of responsible investing funds launched over the last 18 months to meet increasing investor demand. But even investment professionals agree on the importance of investing responsibly. In a recent survey of investment managers overseeing $26 trillion in assets, all confirmed that ESG has played a greater role in investment decision making.
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