Responsible investing is a broad spectrum, which can mean many different things, and has evolved significantly over the past decade. There has been a shift toward investing with a sustainable mindset, and investment managers are responding with an ever-expanding set of responsible investment solutions and approaches.

There are no universally accepted classifications, and we expect the spectrum and definitions will continue to evolve as new solutions and innovations enter the investment industry. Currently, Sun Life Global Investments has classified established investment approaches into the categories below. 

Investment approach Screening ESG integration Sustainability-focused Impact-first Philanthropy

Definition

Actively eliminate or select investments according to specific ethical values Mitigate risky ESG practices in order to protect value Address specific societal challenges that generate competitive returns Measure progress against specific environmental and social goals Measure progress against specific environmental and social goals without striving for returns

Primary objective is delivering competitive returns

         
Goal of social and/or environmental impact          

Negative screening (divestment)

There are essentially two categories of negative screening:

  1. One of the oldest forms of modern responsible investing is ethical and socially responsible investing (SRI). SRI, in its oldest form, entails screening for  companies or sectors deemed unethical or socially unjust (“sin stocks”) based on shared beliefs, values, or preferences, and eliminating them from the portfolio (known as divestment).

  2. In recent years, SRI can also screen companies for a variety of preferences including Environmental, Social and/or Governance (ESG) considerations. For instance, exclusions can relate to products and/or services being offered (e.g. tobacco, gambling), operations (e.g. fossil fuel exploration and/or production, thermal coal), or business conduct (e.g. violation of human rights principles).

Exhibit 1 illustrates how negative screening has evolved over time. 

Exhibit 1: Milestones in the use of screening in responsible investment

1978 1971 1980s 1985 1993 2006 2016 2018 2019

Quaker movement in the US prohibits members from participating in the slave trade

Launch of Pax World Fund, first socially responsible mutual fund in the US

Widespread divestment from South Africa in  protest of the apartheid

Friends Provident in the UK launches first ethically screened investment fund

$625B invested using exclusionary screens

Launch of the UNPRI (now PRI)

Norges Bank Investment Management commences divestment from thermal coal companies

California State Teachers’ Retirement System divests from operators of private prisons in the US

French pension fund ERAFP divests from all tobacco holdings

Positive screening

Addressing screening-based approaches would not be complete without mention of positive screening (ruling an investment as eligible) based on ESG criteria. Positive screens include selecting companies with attractive or improving ESG profiles or those that meet specific standards or thresholds. Examples of the latter include screening for companies that abide by international human rights standards or that are involved in delivering net positive societal and/or environmental impacts or outcomes.

Summary of divestment strategies

To summarize, screening approaches generally include:

  • Values-based screening: investing in accordance to specific values and/or principles (i.e. exclusion of military weapons, gambling, or unfavorable business practices or norms),
  • Risk screening: investing in recognition of certain perceived and/or systemic risks (i.e. exclusion of companies involved in the exploration and production of fossil fuels, or the exclusion of companies or government debt in violation of human rights), and
  • ESG screening: investing in recognition of positive ESG characteristics (i.e. companies with enhanced sustainability profiles such as unfavorable/favorable environmental or labour practices).

Engagement

An alternative to completely divesting from particular industries or categories is to engage with companies that have a goal of improving their approach to ESG. Unlike negative screening or divestment, engagement relies on active ownership. The Principles for Responsible Investment (PRI) define engagement as “interactions between the investor and current or potential investees (which may be companies, governments, municipalities, etc.) on ESG issues. Engagements are undertaken to influence (or identify the need to influence) ESG practices and/or improve ESG disclosure.”

Engagement activities can take form via:

  • shareholder/bondholder engagement
  • proxy voting
  • individual or collective efforts (for example, collaborative investor initiatives such as Climate Action 100+)

Constructive dialogue on ESG issues is an essential way to promote a global financial system that delivers attractive long-term risk-adjusted returns, as well as improved sustainable outcomes.  Taken a step further, engaging with key corporations (i.e. defined by sheer size, global supply network or footprint, by product/service, by theme, etc.) can prove an effective way to drive meaningful and lasting change by altering—or even disrupting—certain business practices or activities.

Detailed and accurate disclosures are key

Driving real world or economy outcomes is a necessary step in transforming our landscape towards greater environmental and social stability. For instance, encouraging companies to report comprehensive, unbiased, reliable and transparent information provides external stakeholders, including investors, a wider array of decision-useful information. Insufficient disclosure of risks, opportunities, as well as specific or contextual circumstances can result in incomplete or inaccurate assessments, and by extension, suboptimal investment decisions.  

Moreover, companies can be held to greater account if required to publish more comprehensive data on themes that are pertinent to their ability to drive longer-term value creation or destruction of shareholder capital. For example, companies should be encouraged to report on fossil fuel usage or reserves, stranded assets, or social issues such as Diversity, Equity and Inclusion or human rights.

Companies need to evolve beyond just disclosure

Working towards real outcomes does not end with adequate disclosures. Engaging on critical issues—issues that are pervasive and far reaching-is another important avenue. There are many examples, including

  • engaging on the use of antibiotics in supply chains,
  • climate change,
  • the use of single-use plastics, or
  • activities often linked to child labor (cocoa farms, cotton, mining).

Influencing corporate behaviour on these critical issues can lead to meaningful change, benefitting multiple stakeholders and the broader society.