Article last updated 24 October 2025.
ESG integration
At the core of responsible investment is the integration of financially material environmental, social and governance (ESG) factors into every stage of the investment process. These considerations are embedded within fundamental financial analysis to inform, and potentially change, views on the potential for a given investment to deliver long-term investment returns.
To do this, it is important to first identify the ESG issues most material, or important, to each sector and then assess how these might positively or negatively affect a company’s financial performance. Materiality is assessed by considering both how likely it is that the ESG issue will affect financial performance and how significant the resulting impact would be.
Systemic issues such as climate change, inequality, and biodiversity loss may be considered alongside company-specific factors. Rather than trying to eliminate ESG risks entirely, the goal is to build a well-rounded view of each company or investment, enabling more informed decisions and better risk-adjusted returns.
Avoidance screening
Charities may wish to avoid investments that conflict with the mission of their organisation, or which might reduce support for the charity or harm its reputation amongst supporters or beneficiaries.
This might consider activities of concern, for example a health charity choosing to avoid investments in tobacco or alcohol manufacturers. Or it might involve broader considerations of socially or environmentally harmful business practices, for example a human rights charity choosing to avoid companies that are failing to address the risk of child labour in their operations and supply chains.
It is important to have a clear understanding on the reasons behind any exclusions and avoidance criteria, and to discuss with your investment managers any nuances in your responsible investment policy and the approach you wish to be taken in implementing it.
Sustainability analysis and alignment
Sustainability analysis may be used as another lens through which to integrate ESG considerations into investment decisions, often with a focus on more systemic, long-term issues such as climate change.
Additionally, it can be a tool for charities that want to establish minimum standards of sustainability across their investments or to align investments with a particular social or environmental theme.
As with avoidance screening, such approaches might seek out investments aligned to certain sustainable activities, for example companies involved in low carbon technologies, educational services, or healthcare provision. Or they may focus on the way in which a company manages its own operations, for example plans to reach net zero greenhouse gas emissions within a specified timeframe.
Stewardship and engagement
Stewardship and engagement refer to the interactions between investors and the organisations they do or may invest in. It can also include dialogue with regulators, policymakers, standard setters, or entire industries.
It provides a route for investors to address ethical or ESG concerns, improve oversight of sustainability issues, enhance public disclosure and transparency, and, ultimately, seek to drive real-world change and improvement in sustainability outcomes. It can also provide valuable insights into how companies are managing ESG and sustainability risks and opportunities to inform investment decision making.
Effective engagement is built on open, ongoing dialogue with company management. By fostering long-term, constructive relationships, but also setting clear objectives and being prepared to ask challenging questions when necessary, engagement can be a powerful tool for charities wishing to further their mission via their investments.
Why responsible investment matters for charities
Responsible investment is about more than compliance with exclusions, it’s about aligning capital with your organisation’s mission and strengthening your reputation and relationships with stakeholders, while protecting long-term financial returns.
By integrating ESG factors, applying clear exclusions, engaging actively with companies, and reporting transparently, charities can demonstrate that their investments are managed in line with both fiduciary duties and organisational values.
By partnering with an investment manager that has expertise in responsible, ethical or sustainable investment, charities can be empowered to influence corporate behaviour, support sustainable development, and ensure their portfolios reflect their purpose.
For more information, contact us on 020 7399 0000, or at charities@rathbones.com.