Responsible Investing: what it means & how to get started
Responsible Investing (also referred to as “green investing”, “ethical investing” or “sustainability investing”) is the practice of selecting investments based on certain ethical or moral principles. The growth and adoption of Responsible Investment is being driven by a new generation of investors who want to align their investment and personal values. This typically means investing in companies that have good environment, social and governance (known as ESG) credentials on the following issues:
- Environmental issues (pollution, climate change, water and other scarce resources)
- Social issues (local communities, employees, health and safety)
- Corporate governance issues (prudent management, business ethics, strong boards, appropriate executive pay)
What are the different approaches to Responsible Investing?
The investment industry has evolved a lot in the past decade, and there’s now a range of ethical and responsible investment options to suit people’s preferences. The following are the main approaches that investment managers will use when building a portfolio of companies or investments:
- Negative screening – This is the simplest, and most traditional method. It involves screening out industries, or individual companies so that the investors have no stake in them e.g. Gun manufacturers, gambling, or a company like Adani which is working to build the Carmichael thermal coal mine in Queensland.
- Positive screening – A positive screen is the opposite; it identifies companies who are doing good work and invests in them. e.g. Renewable energy or health care.
- ESG integration – Investors who take an ESG approach will analyse a potential investment and consider different Environmental, Social and Governance (ESG) factors. They will then use this information to form a selection of companies and determine the ‘weight’ (amount owned) of a particular company in a portfolio, as well as how they engage with a company they are invested in e.g. if an investor is going to invest in an oil company, an ESG approach will help find the oil company that has a superior environmental performance, and treats its employees well.
- Company engagement & shareholder action – Companies listen to their investors, particularly when they are big investors such as banks and super funds. These investors will have meetings with and engage with companies to discuss major issues that they feel the company can improve. If no action is taken, or companies’ replies aren’t sufficient, an investor can choose to file a resolution. If enough investors get behind the resolution it will be voted on at the company’s annual investor meeting and it could very well become part of company policy.
- Impact investing – Impact investors seek out companies whose business operations are focussed on solving some of the world’s biggest challenges. These are companies that have impact at the core of their mission, and they produce an impact report that measures their social or environmental impact.
How do I start incorporating Responsible Investing into my portfolio?
There are many different types of ethical investments, and everyone has different values. Start by thinking about what kind of themes and issues you care most about.
Do you have a keep cup or a stainless-steel water bottle with you? In those instances, perhaps you care about pollution or plastic.
Are you wearing natural materials or synthetic clothing? In these instances, plastics or human rights in the supply chain might be of concern to you.
Do you like the outdoors, animals or being around nature? In these instances, you might care about the environment and want to avoid heavy polluters for example.
Are you already making donations to charities such as The Smith Family, the Red Cross, or other causes? In these instances, you might care about human rights and healthcare.
Are you more concerned about climate change, animal cruelty, human rights abuses, or weapons manufacturing? Maybe you have other concerns?
Here are some areas you may have an opinion on:
- Renewable energy
- Human rights
- Education
- Healthcare
- Sustainable transport
- Safe working conditions
- Animal cruelty
- Alcohol
- Fossil Fuels
- Tobacco
- Gambling
- Pornography
Next, consider how important these issues are to you, and what level of ‘exposure’ to these industries you may be willing to accept. For example, if you’re concerned about climate change, are you willing to accept a small amount of fossil fuel investments in your superannuation fund, or do you think it’s important to fully exclude fossil fuels?
For more information about Responsible Investing or to discuss what kind of social impact you want your portfolio to make, please reach out to your adviser for personalised assistance.