As custodians for some of your wealth, we are strong advocates that for those of you who are interested in this philosophy we can help you achieve this goal.
Responsible investing, also known as ethical investing or sustainable investing, is a holistic approach to investing, where social, environmental, corporate governance and ethical factors are considered alongside financial performance when making an investment.
There are many different ways to engage in responsible investment, and most investors use a combination of strategies including negative or positive screening; environmental, social and governance (ESG) integration; and impact investing.
Anyone can be a responsible investor
Examples of responsible investing vary broadly and could include:
divesting from a company with a poor human rights record;
making an investment in a program or social enterprise that is focused on tackling a pressing social or environmental issue; or
analysing and selecting a portfolio of companies to invest in based on their overall environmental, social and governance performance.
Investors engage in responsible investing for a range of reasons including to align investments with their own or their clients’ personal values and ethics; to reduce risk; and to achieve strong financial returns in the short and long term.
Why is responsible investing worthwhile and important?
All businesses, and therefore all investments, have an impact on people and the planet, both positive and negative. Responsible investing seeks to minimise the negative effects generated by business and promote positive impacts, ultimately delivering a healthier economy, society and environment alongside stronger financial returns.
Simply put, responsible investing is good for business, and investors are realising the materiality of social and environmental themes in determining the risk and return profile of an investment. Companies or assets are unlikely to thrive if they ignore environmental issues (such as pollution, climate change, water and other resources scarcity), social issues (for example, local communities, employees, health and safety), governance issues (such as prudent management, business ethics, corruption, strong boards and appropriate executive pay) or ethical issues.
How do responsible investments perform?
In Australia, responsible investments typically outperform their equivalent mainstream counterparts year on year, over 3, 5 and 10 year horizons. For example, in 2019, Australian equities responsible share funds produced an average return of 10.1% over 5 years and 9% over 10 years. This compares with returns of 7.8% and 6.8% respectively for the S&P/ASX 300 index.
What are the different types of responsible investment?
There are many different ways to engage in responsible investment, and investors often use a combination of strategies including:
ESG integration: involves the systematic and explicit inclusion of environmental, social and governance (ESG) factors into traditional financial analysis and investment decision-making by investment managers. This approach rests on the belief that these factors are a core driver of investment risk and opportunity, rather than being driven by ethical considerations.
Negative or exclusionary screening: screening that systematically excludes specific industries, sectors, companies, practices, countries or jurisdictions from funds that do not align with the responsible investment goals. This approach is also referred to as values-based or ethical screening, as well as divestment. Common criteria used in negative screening include gaming, alcohol, tobacco, fossil fuels, weapons, pornography and animal testing.
Positive screening: screening in sectors, companies or projects selected for positive ESG or sustainability performance relative to industry peers. It may also be referred to as best-in-class screening. It involves identifying companies with superior ESG performance from a variety of industries and markets. Responsible Investment Association Australasia responsible investment.org
Norms-based screening: involves the screening of investments that do not meet minimum standards of business practice, usually based on international norms and conventions such as those defined by the United Nations (UN). In practice, norms-based screening may involve the exclusion of companies that contravene the UN Convention on Cluster Munitions, as well as positive screening based on ESG criteria developed through international bodies such as the UNGC (UN Global Compact), ILO (International Labour Organisation) and UNICEF (UN Children’s Fund).
Corporate engagement and shareholder action: refers to the employment of shareholder power to influence a company’s behaviour. This may be conducted through direct corporate engagement such as communications with senior management or boards, filing and voting on shareholder proposals and proxy voting in alignment with comprehensive ESG guidelines.
Sustainability-themed investing: relates to investment in themes or assets that specifically relate to sustainability themes. This commonly involves funds that invest in clean energy, green technology, sustainable agriculture and forestry, green property or water technology where the fund has the explicit objective of driving improved sustainability outcomes alongside financial returns.
Impact investing: targeted investments made into organisations, projects or funds with the intention of generating positive, measurable social and environmental outcomes, alongside a financial return.