What does Responsible Investment mean?
Responsible investment is an umbrella term used to describe an investment process which takes Environmental, Social, Governance (ESG) or ethical considerations into account. This approach is in addition to the usual investment selection and management process.
Responsible Investment allows investors to ensure their investments are in line with their values and to invest in business and industries that will benefit society and the world we live in.
Let’s have a look at some of the ways responsible investment is carried out.
Responsible Investment screening
Screening is used to narrow down investments, based on ESG and ethical factors.
Negative screening of companies or sectors
This method avoids certain types of investments. Tobacco, armaments, alcohol, uranium, animal testing and gambling, or companies which have an adverse impact on the environment, are those most commonly identified.
Positive investment in sustainable industries
Positive screening seeks out companies deemed to have a positive impact on society and the environment. This could include water and waste management, renewable energy, energy efficiency, sustainable agriculture, forestry and fishing, microfinance, mass transport, sustainable property, affordable housing, education, aged care and health care.
Best of sector
Best of sector funds invest in all industries, but choose only those companies considered to have the most successful ESG performance out of their peer group. The guiding influence of this style is that all industries should strive toward sustainability and the management of ESG risks including those industries considered to be harmful.
The economic and policy factors that are supporting a move toward sustainability have given rise to “thematic” funds which are designed to identify winners in the new Green Economy.
These “themed” funds concentrate on investments that adhere positively to a particular sustainability theme such as environmental technology, management of climate change risks, sustainable agriculture and forestry, water technology, waste management, sustainable property and infrastructure, human rights, microfinance or governance.
ESG analysis is a process undertaken by mainstream investment organisations to determine the extent to which these issues will affect the risk and return of a particular company or investment opportunity. This research is then integrated into the traditional valuation process, asset allocation methodology or voting and engagement practices.
Sustainability analysis describes a process that takes these ESG risk and return issues into account, but also looks at the sustainability outcomes that the investment achieves.
Shareholder engagement and activism
Some funds actively engage with the companies they invest in to seek improvements on their ESG performance. This is another way in which responsible investors use their collective influence to seek positive outcomes at an organisational level.
Using shareholder voting rights is another powerful way to achieve improved ESG performance. It may be difficult to achieve a majority vote for resolutions based on environmental or social issues but a positive vote of about 15% or more is often enough to capture the attention of a corporate board and to affect change. Funds which are “active owners” will exercise their right to vote and their right to raise resolutions in order to achieve better management outcomes.
This emerging investment style involves actively placing capital in businesses and funds that are directed toward solving specific and significant environmental and social challenges. Investors usually include high net wealth individuals, institutional investors, charities, corporations and foundations who invest across a wide range of asset classes and where success is measured by a combination of financial returns and environmental and social impact.
Whatever the approach, Responsible Investment is supported by deep research across a range of important issues and their consequences. This research is gathered from many different sources including the media, specialist research providers and broking houses, specialist ratings agencies, from environmental and human rights organisations, one-on-one interviews with target companies, questionnaires filled out by companies, analysis of company sustainability reports and published data on regulatory breaches and fines.
Want to learn more?
Across the world, superannuation funds and fund managers have signed the United Nations Principles for Responsible Investment (PRI). This initiative requires signatories to establish a Responsible Investment framework which actively integrates ESG into their investment choices and ownership practices. Find out which New Zealand investment organisations have signed the PRI.
Elements of the information appearing on this page were kindly provided by the Responsible Investment Association of Australasia.