You are here:Home / ESG & Carbon / Introduction / Guide to Responsible Investing

Guide to Responsible Investing

Especially in today's world, sustainability should be more than simply a slogan. Sustainability describes the general principle for a human development that is fit for the future.

One definition of sustainable development commonly used today was established by the World Commission on Environment and Development chaired by former Norwegian Prime Minister Gro Harlem Brundtland (source: Brundtland Report/ Our Common Future):

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: The concept of ‘needs’, in particular the essential needs of the world’s poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet the present and future needs” (WCED: 1987)

This makes social aspects and the responsibility of people and societies just as important as the previously dominant understanding of sustainability, which was focused on the environment.

Today’s understanding of sustainability is three-dimensional, referring to ecological, social, and economic concerns.

When investors are considering these sustainability criteria in their investment decisions, we are talking about Sustainable and Responsible Investing – short SRI. There are many different terms, approaches and strategies in the field of SRI but generally all of them mean to include environmental, social and governance factors to the investment decision. (click here for more definitions)

The origins of SRI are dating back to the 18th century, when religious groups were excluding “sin stocks” such as liquor, tobacco, gambling or slave trade from their portfolio. During the 1970s, the quantity of Responsible Investment funds was growing continuously. These funds primarily focused on social aspects and excluded for example companies that were involved in the production of armaments for the Vietnam war or doing business with the Apartheid-based South Africa.

Under the impact of globally present disasters such as the explosion of the nuclear power station in Chernobyl or the ‘Exxon Valdez’ accident, the concept of Responsible Investments was expanded by the environmental dimension, which was constantly increasing in its importance due to the challenges linked to the global warming. Specialized ‘thematic’ or ‘impact’ funds are not only excluding “immoral” stocks, but they are intending to generate a measurable social and/or environmental impact additional to a financial return.

Today, the concept of SRI has become an integral part of the financial world and plays a major role for various groups of actors. It is a generic term, referring to the incorporation of Environmental, Social and Governance (ESG) issues into the investment process.

Why Invest Responsibly?

  • Performance: SRI can help to identify sustainable and profitabel investment themes. If a company has a better ESG profile than its peer, it might be a positive indicator for its long-term potential for success. Recent literature shows that SRI portfolios can outperform benchmarks and conventional funds. However, specialized expertise is crucial for successful responsible investments.
  • Risk forecasting: The analysis of ESG factors is an opportunity for an active risk management. It can help to understand externalities and to predict whether a company is prepared for future risks and challenges. Especially the financial crisis and disasters such as the Deepwater Horizon oil spill have shown that a bad governance or high exposure to environmental risks can lead to significant losses for investors.
  • Risk diversification:Specialized impact investment themes might have a low correlation with the traditional financial market and can therefore help to diversify a portfolio.
  • Reputation: For some investors it might be a reputation risk if they are investing in controversial companies that have a negative social or environmental impact. Therefore they have a strong interest to exclude such companies from their portfolio.
  • Linking Values to Value: Especially charitable investors such as foundations have a strong concern with Responsible Investments because SRI allow them to achieve a “dual return”. Specific impact investment strategies such as Microfinance or specialized renewable energy projects can generate a financial return as well as a direct, positive impact to the society in accordance with a foundation’s mission.
  • Active Contribution to a Sustainable Development: Incorporating ESG issues in the investment decision allows to invest in line with personal values and supporting companies and technologies that have a positive impact to the society. This enables an investor to actively contribute to a sustainable development and to encourage companies to implement sustainable business practices.

More Information: