There are two main strands of what is known as responsible investment – ethical funds and ESG (environmental, social and governance) funds. While both take account of environmental and social impacts when they weigh up making a specific investment, they do it in different ways, which can affect the ultimate investment decision.
An ESG fund takes into account environmental and social impacts in their financial analysis and considers how they might affect the risk and return of a specific investment, known as ESG integration. For instance, they might weigh the risk of higher fuel prices and increased government regulation of carbon emissions on the performance of a transport company which relies on a fleet of vehicles.
An ethical fund also conducts ESG analysis, but in addition has a list of exclusions of industries in which it will not invest as well seeking investments which make a positive change.
"That means, irrespective of the perceived financial merits of an investment, there are certain things which an ethical fund is not going to invest in," says Stuart Palmer, head of ethics research at fund manager Australian Ethical.
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