When considering a socially responsible investment (SRI) portfolio, it’s natural to have questions. Some people want to know how performance is likely to compare with non-SRI investments, others want to know how we measure and score our socially responsible portfolios. In this blog we answer some common queries.
In this video, our chief investment officer, James McManus, explains why we began socially responsible investing at Nutmeg.
How do you decide if an investment is ethical?
There are many ways to decide whether an investment is ethical. If the investment is in a company, you could try to calculate that company’s carbon footprint, look at how it treats its workers, or count how many independent directors are on its board, for example.
We think all of these factors are important, so we use a system that scores investments based on a range of data. Broadly, the data covers three concepts – environmental, social and governance. Our white paper explains our process.
MSCI, a market-leading financial information provider and compiler of indices, is our data source.
Will I get lower returns if I invest in a socially responsible way?
This is one of the most frequently asked questions in ethical investing. Many investors fear that “doing good” with their money will mean accepting a lower return.
We disagree. According to our analysis, there are no statistically reliable differences between the returns from conventional and socially responsible strategies; in fact, socially responsible strategies have often outperformed conventional ones on a risk-adjusted basis1.
What investments are excluded from socially responsible portfolios?
At a minimum, our socially responsible portfolios exclude entities involved in making nuclear bombs or other controversial weapons, such as landmines. We also exclude companies with significant exposure to the tobacco industry.
Our portfolios may shun entities involved in gambling, alcohol and genetic modification.
Exclusion is not always clear cut because most companies have complex businesses. The ethical funds we invest in usually have rules about how much of a company’s income is allowed to derive from unethical activities. For instance, a supermarket may be excluded if its revenues from tobacco exceed 5% of overall turnover.
Read more: How social responsibility exclusions work
What are Nutmeg’s credentials as a responsible investor?
We’re a signatory to the Principles of Responsible Investment (PRI), an organisation supported by the United Nations. As well as promoting ethical investing, the PRI provides accountability. If signatories do not uphold the organisation’s six principles, they can be delisted. We believe this kind of discipline is important to make sure investment firms take ethical investing seriously and do not misuse it as a marketing ploy.
In addition, we hope our transparent investment process, as detailed in our white paper, speaks for itself.
Read more: The importance of being responsible
In the future, will socially responsible investing be the norm?
Ethical investing is growing fast, with some estimates suggesting as much as $30 trillion globally is invested in a socially responsible way. But there is still room for improvement.
In truth, it is unlikely that every investment pot on earth will become socially responsible soon, but this approach to investing is already exerting an influence on the wider financial industry.
Money managers everywhere are paying more attention to how their investments score on environmental, social and governance factors, and that can only be a good thing.
Any more questions about socially responsible investing?
We hope these resources have answered some of your questions. If you have further queries please feel free to contact our customer service team.
- Nutmeg calculations using data from Macrobond for the period September 2007 to October 2018. Indices used are MSCI Mid & Large Cap Net Total Return. For more information: How do socially responsible portfolios perform
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.