What exactly is Responsible Investment?

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.

ESG integration

ESG integration involves the systematic and explicit inclusion of environmental, social and governance 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 value and risk.  Examples of ESG factors are:

EnvironmentalSocialGovernance
  • Carbon emissions
  • Land use
  • Toxic spills
  • Waste & water management
  • Tobacco & alcohol
  • Gambling & pornography
  • Child labour
  • Factory farming
  • Nuclear weapons & land mines
  • Ensuring shareholders are heard
  • Ensuring boards do their job
  • Aligning pay with performance
  • Minimising conflicts of interest
  • Ensuring best practices

Negative 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.  Common criteria used in negative screening include gaming, alcohol, tobacco, weapons, pornography and animal testing.

Positive screening

Involves screening investment 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.

Sustainability themed investing

Involves 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.  This category also includes multi-strategy portfolios that may contain a variety of asset classes or a combination of these themes.

Corporate advocacy and shareholder action

Refers to the employment of shareholder power to influence corporate behaviour.  This may be conducted through direct corporate engagement such as communications with senior management or boards, filing or co-filing shareholder proposals and proxy voting alignment with comprehensive ESG guidelines.

Norms-based screening

Involves the screening of investments that do not meet minimum standards of business practice.  Standards applied are based on international norms 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 (United Nations Global Compact), ILO (International Labour Organisation), UNICEF (United Nations Children's Fund) and the UNHRC (United Nations Human Rights Council).

Impact investing

Targeted investments aimed at addressing social or environmental issues while also creating positive financial returns for investors.  Impact investing includes community investing, which involves projects that have a defined social purpose, as well as environmental investing that typically aims to finance initiatives that address key environmental issues.

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.

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