Increasingly investors have begun to realise that financial metrics alone do not necessarily provide them with the best analysis of a company’s future potential. Many factors contribute to a firm’s performance and ignoring them can pay off in the short run but effectively leave a company underinvested or exposed to risk.
Responsible Investment brings some of these factors into the investment analysis, typically looking at Environmental, Social and Governance (ESG) issues. Research attempting to discern if ESG factors have a positive impact on financial returns is mixed, though broadly supportive that it does.
Tomorrow’s Company is particularly interested in Responsible Investment as we believe these factors will grow in importance. For example, climate change looks set to have a huge impact on markets, affecting prices and creating opportunities for businesses which can react to new problems; a firm that does not take that into account will be exposed to more risk than their balance sheet suggests and will be unlikely to be the leading innovators that meet environmental challenges.