Over the last few years, the responsible investment market has recorded steady growth.
What are responsible investments?
Responsible investments, also known as ethical or sustainable investments, are a wide-ranging approach to investing factoring in human, societal and environmental factors, along with financial performance, when managing investments.
Responsible investors seek to minimise the negative effects generated by business and promote positive impacts, so as to align with their personal values and ethics; and to reduce risk within the portfolio.
The Responsible Investment Association Australasia (RIAA)’s spectrum of responsible investments ranges from:
- avoiding harmful activities (such as tobacco, gambling or fossil fuels) while delivering competitive returns
- contributing to a better system and economic stability by using investor rights to influence stakeholders
- actively pursuing opportunities that achieve positive outcomes (such as social housing or renewable energy).
What are the different types?
Responsible investment covers many terms that you may have heard of:
Environmental, Social, and Governance (ESG) integration: Ongoing consideration of ESG factors within an investment decision-making process with the aim to improve risk-adjusted returns, based on the belief that ESG factors can affect the risk and return of investments (e.g. carbon emissions, labour ethics, or board diversity).
Negative/exclusionary screening: Applying rules-based criteria to screen out investments due to an unacceptable downside risk or values misalignment (e.g. excluding certain sectors, companies, countries or issuers).
Minimum-standards (norms-based) screening: Screening out any investments that do not meet minimum standards of business practice based on international norms (e.g. screening for involvement in controversies).
Corporate engagement and shareholder action (stewardship): A fund manager can influence changes in a company’s conduct using investor rights to protect and enhance ESG related matters (e.g. voting at shareholder meetings, nominating directors to the board or submitting shareholder proposals).
Positive/ best-in-class screening: Intentionally tilting a percentage of a portfolio towards solutions; or targeting companies or industries assessed to have better ESG performance relative to peers.
Sustainability themed investing: Selecting investments to access specified trends which may be medium to long term in duration, regional or global in scope (e.g. sustainable agriculture, green property, ‘low carbon’, Paris or SDG-aligned).
Impact investing: Investing with the intention to generate positive, social and/or environmental impact and measuring and reporting against these impacts while achieving a financial return (e.g. improvements in people’s lives and the environment).
Is responsible investment right for me?
It’s about matching the right strategy to your needs. There is no one best approach to responsible investment and it may mean something slightly different to different investors.
Prue Cheeseman is a financial adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696. This article contains general advice which does not consider your particular circumstances. You should seek advice from HLB Mann Judd Wealth Management (NSW) who can consider if the strategies and products are right for you.