Ethical and Socially Responsible Investments

What is Responsible Investment?

Responsible Investment is an umbrella term to describe an investment process which takes environmental, social, governance (ESG) or ethical considerations into account. This process stands in addition to, or is incorporated into the usual fundamental investment selection and management process of looking at the financial health of the underlying investments.

Many clients before they see us have monies invested in superannuation and or non-superannuation investments whose underlying investments may expose the clients to companies whose practices may contravene one or all of those issues they feel passionate about.

Responsible Investments enable you the investor to base your financial decisions on your convictions, end up with solid returns and make a positive contribution to our world.

Demand for Responsible Investment is increasing!

The recent Global Financial Crisis made investors aware of the importance of considering good corporate ethics, governance and environmental issues when examining the future worth of any investment.

While Responsible Investment was once considered a fad, today it is a very mainstream investment style with responsible investors coming from all walks of life and across all ages.  The Key Findings of the paper “FROM VALUES TO RICHES” released by the Responsible Investment Association of Australasia in November 2017 were:

  • 9 in 10 Australians expect their superannuation or other investments to be invested responsibly and ethically.
  • 4 in 5 Australians would consider switching their super or other investments to another provider if their current fund engaged in activities inconsistent with their values.
  • 53% of Australians will consider making ethical or responsible investments in the next 1 to 5 years.
Responsible Investment screening

In the conventional investment process, screening is used to reduce the investible universe based on preferred financial criteria such as leverage metrics and valuation ratios. In the case of Responsible Investment however, additional screening includes ESG and ethical factors such as:

Negative screens - the exclusion or avoidance of an investment based upon:

  • The production of excessive greenhouse gas emissions and other pollution;
  • Uranium mining;
  • Logging native and old growth forests;
  • Nuclear Power;
  • Fossil Fuels;
  • Gaming equipment;
  • Tobacco;
  • Alcohol;
  • Weapons manufacture and supply;
  • Child labour and slave labour; or
  • Other human rights abuses.

Positive Screens- the favourable consideration of an investment opportunity based upon these issues:

  • Recycling;
  • Reduction in resource use;
  • Renewable energy;
  • Sustainable Buildings; or
  • Systems in place to identify conflicts of interest.
Best of sector

This investment style implies that all industries should adopt higher standards of ESG practice in order to meet the expectations of society and to achieve sustainable and profitable business goals. This process does not involve negative screening, but rather identifies those companies with superior ESG performance from across all sectors.

Thematic Investment

Portfolios which contain only those investments that adhere positively to a particular sustainability theme such as environmental technology, carbon intensity, sustainable agriculture and forestry, water technology, waste management, community investing, affordable housing, sustainable property and infrastructure, human rights, microfinance or governance.

Impact Investing

This emerging investment style involves actively placing capital in businesses and funds that are directed toward solving specific and significant environmental and social challenges. By leveraging the private sector, these investments can provide solutions at a scale that purely philanthropic interventions usually cannot reach. Success is measured by a combination of financial returns and environmental and social impact.

Engagement with companies on ESG issues

Engagement is the process by which an investor or asset manager or specialist firm will contact companies to build the business case for better management of ESG issues. Engagement can sometimes involve the formal or informal collaboration with likeminded investors on common issues that can increase the likelihood of a positive outcome from the engagement process.

Shareholder Activism – Voting and Resolutions

Investors who are active owners will exercise their right to vote and their right to raise resolutions in order to achieve better management outcomes. Investor activism on governance issues has grown substantially in the last ten years, particularly in Britain and the United States, and especially in relation to director elections and remuneration. More recently, environmental and social resolutions have also grown in number and support in the United States and in 2011 Australia’s first dedicated climate change shareholder resolution was brought forward.

What sort of returns can you expect?

As shown in the table above, domestic and multi-sector Responsible Investment Funds have outperformed average mainstream funds for the periods 1, 3, 5, 7 and 10 years, to December 2018. Responsibly invested international share funds outperformed over longer time horizons but slightly underperformed over the short term.

Useful Links

The Responsible Investment Association Australasia (RIAA) is the peak industry body for professionals working in Responsible Investment in Australia and New Zealand.

The Ethical Advisers’ Co-operative Ltd (Co-op) is a member operated organisation created to help you understand ethical investment and see the peace of mind that comes with aligning your investments with your values.

Why are we involved with ‘Ethical’ investing?

We feel passionate about a range of issues such as the:

  • Effects of climate change
  • Fossil fuels
  • Gambling
  • Tobacco
  • Use of sweatshops
  • Production of weapons of mass destruction
  • Effective use of our natural resources
  • Rapidly growing and ageing population
  • Corporate, environmental and social practices of companies

We support groups such as:

  • Conservation SA
  • Cancer SA
  • The Adelaide Remakery