You might be thinking that sounds a little too good to be true.
But it isn’t.
When you invest, particularly in funds, you can feel a bit removed from where your money ends up. You might have a rough or even a good idea of what you’re investing in, but it’s really easy to forget that your money is put into real companies.
Which means your money funds the outputs and outcomes of those companies.
Here’s how your money can make a difference. But first, the fine print. This article can give you helpful tips, but it isn’t personal advice. When you invest, there’s a risk that you could get back less than you put in. That’s because investments can fall as well as rise. If you’re not sure if investing is right for you, you can speak to an independent financial adviser through Unbiased Link opens in a new window.
Where does your money go when it’s invested?
There’re lots of different ways and things you can invest in. Some of the most common ones are bonds and shares.
Investing in bonds means you lend money to a company (or even the government – government bonds in the UK are called ‘Gilts’) for a certain time. As a ‘thanks for lending us money’, investors receive interest payments as well as the return of the money initially loaned at the end of an agreed time-period.
When you invest in shares, either in individual companies or in funds, you’re buying very small pieces of companies.
It might be small, but it can be mighty, because you become a shareholder.
Shareholders are important, as they have the right to vote on things that are important to the business.
Like a company’s climate change policy (environmental factors), or even who the board of directors are (governance factors). Larger shareholders do have more influence, but that doesn’t mean that smaller shareholders can’t help to make a difference.
So, keeping in mind that you own parts of companies, your money is enabling that company to make decisions with it.
Other than voting, holding bonds and shares in companies means that investors can help to encourage and promote good behaviours. This happens through engaging with companies to encourage them to make positive changes.
But why’s it important?
Well, most importantly, it can benefit people and the planet. But it can also lead to better long-term financial performance for the companies, and therefore their investors!
What is responsible investing?
Responsible Investing is a way to use your money to make profit that also considers people and the planet.
When you invest into a fund that is fully or even partially responsible, the fund managers are making decisions about where to invest your money. They look at certain factors which we like to call the three P’s, but you might find others calling them ESG. That stands for Environment, Social and Governance.
- People
This is about how companies treat their staff. They’ll look at how their suppliers treat their staff fairly, and whether they consider the impact of their organisation on the wider community. For example, more responsible companies will have clear standards for treatment of staff, and fair wages. - Planet
This looks at how companies use their resources, and whether they affect the environment, and whether the waste they produce has an impact on the planet. This is where you’ll often hear about companies setting Net Zero carbon emission goals. For example, more responsible companies will have plans to shift towards reducing carbon emissions, minimising waste, and meeting standards to protect nature. - Profit
This looks at how companies are being run from a financial point of view, and whether they consider their stakeholders when making decisions that could impact their business. If stakeholders are being listened to, it can show that companies are more considerate about how they make money. Those decisions can also have an impact on the other two P’s. They all fit together nicely.
Why is responsible investing important?
The world is changing. There’s no doubt about it.
There aren’t infinite resources on earth, and we might find that, in time, those resources run out. That can hugely affect the economy and cause lots of disruption in the markets.
Let’s look at an example.
Oil and gas is always a prominent sector in the market. In fact, Shell is the second largest company on the London Stock Exchange, with BP in fifth place.
We know that fossil fuels contribute to climate change, and if we don’t make changes soon, we’re likely to see more natural disasters and pollution that affect everyday life.
With such a large industry taking up so much of the market, it’s not difficult to see how these companies could be impacted if they didn’t make necessary changes towards reducing their climate impacts, and how the markets can also be affected.
How can investing responsibly make a difference?
When you’re investing, you’re making meaningful decisions with your money, that could be part of a brighter future.
Here are some of the ways that can happen:
LOUD VOICE: Investing responsibly can push companies to do better. It’s about having a voice and using that voice to make sure companies are doing the right thing when it comes to the three P’s. Fund managers and the financial industry can talk to companies to help make sure they do better. This is more commonly known as active ownership.
FUTURE FORWARD: Some fund managers can set positive tilts based on the three P’s and make sure that the companies that your money is being invested in are working towards a better future. They might still choose companies in sectors that can seem ‘controversial’, like oil and gas, but they’ll make sure that those companies are committed to improving in the future.
NO THANKS: There are other fund managers that use something called ‘exclusions’ to weed out companies that don’t have good outcomes when it comes to the three P’s. For example, they might eliminate an entire sector, like weapons manufacturers or tobacco companies. This is because they don’t think there is a possibility that those companies can hit the three P’s targets in the future.
How to invest responsibly
So, now you know what it’s all about, investing responsibly doesn’t have to be complicated.
One of the easiest ways you can make your money more meaningful is by investing in funds that match your personal views, or that are committed to working towards making the planet a better place.
Investing with Virgin Money means that your money is being invested by experts worldwide to help it grow and spread risk. It also considers the influence your investments can have on people and the planet.
We believe that responsible companies are more likely to be well managed, amongst the best placed for future growth, and contribute to moving to a sustainable low carbon economy.
So basically, we’ve done all the hard work for you.
Where to next?
- Want to find out a bit more about how we invest responsibly? Visit our responsible investing page.
- Already an investor with us and want to check in or top up? Head over to your account.
- Is risk stopping you from investing? We’ve taken a deep dive so you don’t have to.