What is responsible investing?

Responsible investing is an investment approach that takes environmental, social and governance (ESG) factors into account alongside financial returns. The goal is not only to earn a return but also to support positive outcomes for the environment and society, for example by avoiding companies that pollute heavily, violate human rights or engage in unethical business practices.

The term is used in slightly different ways depending on the source: "sustainable investing" and "ESG investing" tend to emphasize long-term, integrated consideration of environmental and social factors, while "socially responsible investing" (SRI) traditionally emphasizes excluding certain industries, such as tobacco, weapons or fossil fuels, from a portfolio. In everyday use the terms overlap heavily and are often used interchangeably.

Common approaches

Responsible investing can be practiced in several ways, and many investors combine more than one approach:

• Negative screening: excluding certain industries or companies from the portfolio, such as tobacco, weapons manufacturing or fossil fuels.
• Positive screening: favoring companies that meet certain sustainability criteria, such as renewable energy producers or companies with strong environmental and social programs.
• ESG integration: including environmental, social and governance factors as part of ordinary investment analysis, alongside financial metrics.
• Impact investing: choosing investments specifically to produce a measurable positive social or environmental effect, in addition to a financial return.
• Active ownership: using shareholder rights, such as voting at general meetings or engaging with company management, to influence how a company operates.

Why it matters

Investors and asset managers point to a few main reasons for taking ESG factors into account:

• Risk management: environmental, social and governance risks can affect a company's long-term financial performance, so considering them can help identify risks that a purely financial analysis might miss.
• Alignment with investor values: many investors want their portfolio to reflect their personal values and priorities, not just maximize short-term return.
• Influence on companies: by choosing where to invest and how to use their voting rights, investors can push companies toward more sustainable and responsible practices.

Responsible investing has become significantly more common over the past decade, and most large banks and fund managers now offer dedicated responsible or sustainable investment funds. As climate change and other environmental and social challenges grow, more investors want their investment decisions to reflect those concerns as well as their return expectations.