How to invest responsibly

Responsible investing is increasingly popular. More people want their investments to make a positive contribution towards issues such as climate change, pollution and human rights.

It’s not just about ‘doing the right thing’, though. There’s a convincing investment case. Dubious practices are often ultimately punished by regulators or consumers, while companies providing solutions to sustainability challenges can be capable of strong growth.

What is responsible investing?

Responsible investing considers social and environmental good as well as financial return. It is often used as an umbrella term that encompasses various approaches, one of which involves incorporating Environmental, Social and Governance (ESG) analysis in an investment process.

It encourages corporate behaviour that promotes environmental stewardship, consumer protection and human rights, and typically means considering (and engaging with companies on) key issues such as climate change, labour management, corporate governance, gender diversity and data security, among others.

It also usually means avoiding businesses involved in areas deemed harmful or unethical such as alcohol, tobacco, gambling, weapons or animal testing. Meanwhile, issues such as energy efficiency, water scarcity, safety, and diversity could be specifically targeted as investment themes.

Responsible investing is all about making investment choices that address these matters.

What are the principles of responsible investment?

Responsible Investing considers social and environmental good as well as a financial return. It is often used as an umbrella term that encompasses various approaches, most of which involve incorporating Environmental, Social and Governance factors in an investment process.

But just what is ESG engagement? It encourages responsible corporate behaviour that promotes environmental stewardship, consumer protection, and human rights, usually through long-standing dialogue between investors and companies. ESG typically means considering (and engaging with companies on) key issues such as:

• Climate change

• Labour management

• Corporate governance

• Gender diversity

• Data security & more

Responsible investing also usually means avoiding businesses involved in areas deemed harmful or unethical such as alcohol, tobacco, gambling, weapons or animal testing. Meanwhile, issues such as energy efficiency, water scarcity, safety, and diversity could be specifically targeted as investment themes.

A clear investment rationale

While various forms of ‘responsible’ are employed, there is no doubt the overall movement has become increasingly popular in recent years. As well as aiming to ‘do the right thing’, there are solid investment reasons to invest with these principles in mind. Dubious practices are often ultimately punished by regulators or consumers, while companies providing solutions to sustainability challenges can be capable of strong growth.

The more investors avoid a company's shares the more it can affect the company’s 'cost of capital' to invest, which affects profitability. Most businesses are now aware there is increasing emphasis on transparency and high standards that go beyond the traditional financial variables that most investors have historically focussed on. Ultimately, these affect the extent to which they can attract capital and the rates at which they can borrow, so they have a vested interest in improving.

Other 'real world' effects can be achieved through existing shareholders demanding material progress on environmental targets such as carbon emissions or social factors such as the fair treatment of workers. These 'engagement' techniques are being further developed, especially in support of decarbonising transport and industrial processes.

However it is done, the more people that invest responsibly the greater pressure there is on companies to improve, helping drive the pace of change. We expect this form of investing to have a considerable influence on companies’ actions and on financial returns going forward.

How to invest responsibly

1. Think about why and how you want to invest. Is it for you or a child, and for what purpose is it – retirement or nearer term? This will dictate the type of investment product you use, such as an ISA, Junior ISA or Pension.
2. Consider how much you are going to contribute and how often. Like any other form of investing, you’ll need to think about whether you can invest as a lump sum, or will you invest in a series of lump sums or monthly contributions.
3. How much risk do you want to take? This is usually connected to how long you want to invest for and how much you can afford to contribute. Maximising higher risk assets such as shares should be carried out over longer investing periods, while for shorter time periods (e.g. 5-10 years) you should generally use some lower-risk areas, such as bonds.
4. Find out your options available in terms of socially responsible fund options. If you are using an investment platform like Charles Stanley's Direct Investment Service, you will have plenty of options from different providers. If you are investing via, for instance, a workplace pension then there may be a more limited number available.
5. Weigh up individual investment and fund selections. Selecting individual shares is an option, though this does take more commitment in terms of research and means it’s harder to get diversification, especially when investing small amounts. For most people, getting instant diversification, as well as the expertise of a specialist fund manager is going to be beneficial. However, it’s important to assess whether the values of that manager meet with your own. There are a selection of fund options to consider here, which we’ll explore below.
6. Consider new fund labels. The launch of a new set of labels known in the industry as SDR (Sustainability-Disclosure Requirements) is designed to show investors which investments meet a high standard of sustainability. Funds have to apply to use a label and they are now starting to appear. Funds taking a broader responsible approach or using other terms such as ‘ethical’ or ‘green’ won’t necessarily have a label. However, they will have documents setting out their sustainability-related investment policies and objectives from 2nd April 2025. For the time being investors should check fund literature carefully to ensure a fund meets their requirements.

Three responsible investment ideas for your portfolio

1. Global equities

Baillie Gifford Positive Change shares a number of characteristics with other Baillie Gifford global funds: A high-conviction, concentrated portfolio (of around 30 holdings), which increases risk as well as return potential, a search for exceptional growth businesses, and a low turnover of holdings resulting from investments being kept for the long term and not actively ‘traded’.

The difference is this fund specifically aims to contribute toward a more sustainable and inclusive world while by investing in four ‘impact themes’: Social inclusion and education, environment and resource needs, healthcare and quality of life and ‘base of the pyramid’ (companies addressing the basic needs of the global poorest). The managers aim to generate and measure the positive impact of investments as well as make money, and there is an active approach to engagement and voting.

The fund will have a distinct bias to more expensive growth-orientated stocks. The managers pay little attention to short-term valuation fluctuations and aren’t overly concerned with short-term reporting numbers. Instead, they try to take at least a five to ten-year view believing that investor short-sightedness is a persistent structural issue in the stock market. The focus is on companies addressing societal challenges. The managers believe that companies making a positive change to society will eventually be rewarded with strong long-term share price performance.

This is an adventurous fund aiming for strong long-term growth, which can mean considerable downs as well as ups, and likely to be of more interest to those willing to accept a high level of risk and commit for the longer term – ten years plus.

2. UK equities

Liontrust Sustainable Future UK Growth invests in 40 to 60 companies that meet the managers’ rules for environmental and social responsibility. The portfolio is constructed from high-quality and sustainable companies benefitting from long-term structural trends. The management team is highly regarded as having established a track record at Aviva and Alliance Trust prior to joining Liontrust.

The investment themes used by the fund encompass safety, resilience, health, quality of life and efficiency, with each stock analysed for ESG factors alongside as return potential. There is a case-by-case approach to engagement with companies on ESG issues. The factors vary according to industry, and there are currently eight proactive initiatives including the sustainable use of plastics, corporate tax responsibility and clothing supply chains. The fund also actively mitigates its carbon footprint.

With a bias to quality ‘growth’ companies, the fund could be reliant on relatively stable economic conditions for outperformance. A sudden economic or political shock could impact its growth-orientated investments to a greater degree than the wider market, and returns could deviate quite significantly from the index or a tracker fund. For longer-term investors, though, we believe the fund offers a strong option for exposure to UK shares.

3. Bonds

Lending to a business is generally less risky than being part owner through shares, so bonds can play an important role in a portfolio. They can help temper the ups and downs of shares, as well as providing a decent, regular income for those who require it.

One established fund option in this area is Rathbone Ethical Bond Fund, managed since 2004 by Bryn Jones. He aims to build a portfolio of good quality investment-grade bonds (avoiding the riskiest ‘high yield’ bonds) while applying a broad range of both positive and negative ESG screening criteria that could appeal to those with ethical concerns.

Thematic research is conducted through topics such as climate change, clean energy, human rights, community investment and employee welfare. The bulk of the portfolio is invested in the bonds of multinational companies and institutions that pass the screens, and there are also a number of charity and green bonds in areas such as social housing, sustainable transport and renewable power.

As certain sectors are excluded on ethical grounds, such as oil & gas, and tobacco, the fund tends to have heavier exposure in financials through insurers and banks. At times this could add to the risk, but we think this is a strong option for UK bond exposure for investors looking for a decent yield.

For more guidance and examples around this topic, check out our free guide to Responsible Investing.

Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.