Responsible and ethical investing

Responsible and ethical investing – what are they and what’s the difference?

Whether it’s the war on waste, human rights abuses, animal rights or climate change that is your issue of choice (or perhaps you’re concerned about all of them), more of us are taking an interest in making decisions with our money that reflect our values.

Recent research from the Responsible Investment Association Australasia (RIAA) shows that 92% of Australians now expect their super or other investments to be invested responsibly and ethically, and that four in five of us would consider switching providers if our current super or investment fund engaged in activities inconsistent with our values.

But while the increased interest in responsible and ethical investing is undeniable, there’s still some confusion around what they actually mean.

Responsible and ethical investing explained

In simple terms responsible investing encompasses a range of investment styles and techniques that take into account environmental, social, governance (ESG) and ethical issues within the investment research, analysis, selection and monitoring process.

For example, funds might screen out companies or sectors due to controversial or unethical business practices or negative social impact (negative screening). Other investment strategies may focus on selecting companies or sectors with a stronger focus on sustainability drivers relative to their peers (positive screening).

Some common examples of factors that might typically be considered include:

  • Environmental: Waste, pollution, greenhouse gas emissions, clean technology products and services, environmental management practices.
  • Social: Workplace health and safety, labor relations and standards, community impacts, human rights.
  • Governance: Board independence and diversity, executive pay and incentives, bribery, and corruption, conflicts of interest, shareholder rights.
  • Ethical: Tobacco, gambling, weapons, testing on animals, controversial medical research such as stem cell research, live animal exports.

The most widely used technique by fund managers is ESG integration, which involves the systematic consideration of ESG risk and return factors alongside financial considerations when making an investment decision.

There’s also impact investing where capital, in the form of your investment, is provided to a business which has the purposeful intention of generating a measurable, beneficial social or environmental impact, in addition to a financial return.

Increasingly fund managers are using a combination of these responsible investing techniques, creating a range of options in the market for customers seeking to line up their own values with their investment profile and appetite for risk.

How to invest responsibly and ethically

When it comes to investing your money – be it your super or other financial investments – it’s become increasingly easier to put your money where your mouth is.

According to RIAA, around 55% of all assets under professional management in Australia were invested responsibly at the end of 2017.

If you’d like to invest more responsibly or ethically it’s important to first consider which issue or issues are of the most importance to you, and how strongly held your convictions are.

Do you prefer avoiding certain industries (for example, the fossil fuel industry) or would you rather favor other industries (such as renewable energy, health-care)? Or perhaps you’re happier with an approach that selects companies that demonstrate the most sustainable characteristics within their industry sector?

If ethical or responsible investing is of interest to you, then please contact our investment team at 08 8231 4709 or send us an email at info@centrawealth.com.au.

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.