Responsible Investing

Ethics in Finance

The principles of ethical behaviour in Finance 

The Financial Sector is guided by a set of principles that aim to ensure that people act ethically when making decisions. Principles may vary in different industries within the sector, however it is important to uphold general principles, such as:     

• Integrity: Preserving honesty when participating in financial engagements.     
• Fiduciary Duty: Making decisions, using the best interests of clients and prioritizing them in respect to their financial state.     
• Transparency: Distributing correct and clear material to all, thus advocating for openness in engagements within the financial sector.
• Accountability: Owning responsibility for all financial decisions, acknowledging obligation for both success and failure.     
• Fairness: Supporting impartiality and equitable treatment towards all financial parties.     
• Confidentiality: Safeguarding sensitive information of potential clients and respecting their privacy.
• Compliance: Following expected regulatory and legal standards, whilst upholding the highest ethical standards.     
• Professionalism: Showing capability, but respect in all professional interactions.     
• Conflicts of Interest Avoidance: Identifying and managing situations where personal interests may conflict with professional obligations. 

Responsible Investing and ESG Factors

Understanding the role of responsible investments 

Responsible investments play a significant role in shaping a more sustainable and ethical approach to the Financial Sector. Responsible investments are specific investments where other factors are taken into account, and not just financial performance. Most often, it is associated with Environmental, Social, and Corporate Governance (ESG) criteria or Impact Investing. 

The characteristics of Environmental, Social, and Corporate Governance 

(ESG) factors and issues Environmental, Social and Corporate Governance (ESG) factors and issues are components that essentially measure the ethical effect of a business. In the modern world, ESG factors are becoming more important because as stated before, potential investors are starting to care more about external factors and not just financial success, i.e. ESG factors. But what do the components mean and what are characteristics of each? 

1.Environmental (E) 

Environmental factors are focused on a business's overall impact on the planet related to issues such as climate change, pollution, waste management etc. 

Characteristics:

• Carbon Footprint: A measure of the amount of CO₂ released into the atmosphere by an entity.     
• Waste Management: How much effort a business makes to reduce, reuse and recycle waste.     
• Renewable Resources: The use of sustainable resources that can be replenished at the rate they are used including raw materials and energy.     
• Biodiversity: The efforts made towards protecting ecosystems.     
• Energy Efficiency: The use of energy-efficient capital. 

2.Social (S) 

Social factors assess how a business interacts with society, including a business's employees, customers and general social issues. It relates to issues such as safety and rights in a general workplace. 

Characteristics:     

• Labour Practices: Taking into consideration labour welfare including issues regarding working conditions, fair wages and general respect towards the rights of workers.     
• Product Safety and Quality: Ensuring that the products supplied by the business are safe and are of good quality for consumers.     
• Inclusion and Diversity: Promoting inclusion and diversity within a workplace where every employee regardless of race, gender, disabilities etc are treated fairly and are provided with equal opportunities.     
• External Engagement: Engaging with and contributing positively to the local community. 

3.Corporate Governance (G) 

Corporate governance alludes to the processes and systems that company's may undertake to direct and manage its operations. It includes the relation between the company's management, its board of directors, shareholders, and other parties generally involved. 

Characteristics:

• Board Structure and Independence: Having an independent board of directors that contribute a useful oversight of the business.     
• Risk Management: Implementing effective methods to identify, assess, and manage risks.     
• Ethical Business Practices: Promoting transparency, integrity, and ethical behaviour in every business transaction.     
• Shareholder Rights: Understanding and respecting the rights of shareholders, ensuring fair treatment towards them and showing awareness to their interest and contributions. 

Impact Investing

What is Impact Investing and how is it different from ESG? 

Although regularly used interchangeably, impact investing and ESG investing are not the same. Both methods are associated with responsible investing but they slightly differ in their uses. Truthfully, they both target the generation of positive outcomes further than financial success mainly of ESG related factors. But the main difference between impact investing and ESG is how they are used to make decisions, and how they are measured.     

The Global Impact Investing Network (GIIN), defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. Meaning that impact investors are more likely to target specific sectors and use impact investment as a main process, and not integrated. Its measurement includes the need for investors to assess and disclose the social or environmental impact of their investments.     

However, ESG investing includes ESG factors into the actual process of making an investment decision, involving the analysis of a firms ESG performance. This is usually paired with traditional financial analysis and is more of an integrated process, rather than a dictatorial process. Also, ESG investing, conversely, centers on the analysis of a company's ESG performance by evaluative processes with the involvement of data analysis and reporting. 

2 types of Impact Investing 

1) Gender Lens Investing: 

Gender lens investing involves the consideration of gender-related impacts in investments. It aims to support gender equality through financial investments and potentially empower women. For example, investing in businesses that have good gender equality cultures and policies, promoting workplace gender diversity, and supporting initiatives that may directly benefit women. 

2) Microfinance: 

Microfinance involves the investment and/or the provision of financial services to individuals or small businesses, especially in economically disadvantaged areas or communities. For example, supporting microfinance institution projects, that provide financial services to marginalized communities.