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Understanding responsible and ethical investing

When it comes to your super and other investments, it seems many of us aren’t just concerned about getting the highest possible return – instead, there’s a growing interest in responsible and ethical investment.

According to research by the Responsible Investment Association Australasia (RIAA), nine out of ten Australians expect their super and other investments to be invested responsibly and ethically.1

Not only do we want our investments to produce a good investment return, many of us also want our money to be invested in line with our personal values.

But, before you dive in on a mission to do good while saving for your retirement, there’s a few things you should know about responsible and ethical investment.

How does responsible investment work?

Traditionally, large investors and super funds only considered financial issues like the future performance of a business when selecting an investment asset, but all that is changing.

“It’s clear there are a lot of drivers that impact investment returns that do not sit on the financial accounts. Responsible investment is about understanding there are recognisable non-financial factors that impact the share price and markets,” explains Simon O’Connor, Chief Executive Officer of RIAA.

“We have seen lots of examples recently where companies have mismanaged their non-financial activities and it has led to movements in their share price. Responsible investment is about understanding these factors and the impact they could have.”

Responsible investment considers a range of environmental, social and governance (ESG) factors in conjunction with normal financial analysis. These include environmental issues such as climate change, social concerns such as health and safety, and governance issues such as executive pay.

Global trend to going responsible

Interest in responsible investment is not confined to Australian investors.

The United Nations is actively boosting responsible investment through its Principles of Responsible Investment (PRI), an independent body that encourages investors to use responsible investment as a way to enhance returns and better manage risks.

The PRI helps its members to understand the investment implications of ESG factors on their investment and ownership decisions. Colonial First State became a signatory to the PRI in April 2017.2

When it comes to the mechanics of responsible investment, there are different approaches, but the most common is to ‘screen’ a potential investment on its involvement in specific industries.

This usually involves a ‘negative screen’ to exclude a company involved in a specific activity, like gambling or animal testing, or a ‘positive screen’ to select companies whose products and services have a positive impact on society and the environment. 

Responsible investment looks at things from an investment risk and investment outcome perspective, whereas ethical investing is more of a values-based approach.

Responsible versus ethical investment

While investment managers often take ESG issues into consideration when selecting assets, some people want to go further and ensure none of their money is invested in businesses they see as unethical.

“It is important to recognise there is a difference between responsible investment and ethical investing. Responsible investment looks at things from an investment risk and investment outcome perspective, whereas ethical investing is more of a values-based approach,” explains O’Connor.

If ethical investing matters to you, it’s essential to consider what types of investments will align with your personal values, as ‘ethical’ can mean different things to different people.

RIAA polling shows many Australians don’t want to invest in companies involved in tobacco and the production of armaments, but others are more concerned about fossil fuels and climate change.

“A good way to start is to sit down and ask if there are industries you wouldn’t want to support with your investments and superannuation savings,” he says.

Taking a positive approach

Avoiding particular companies and industries is not the only route.

“Many people start by thinking about avoiding harmful industries, but it is also possible to target positive industries,” O’Connor explains.

“There are an increasing number of offerings aimed at tapping new industries and economic developments likely to perform well in the future. It is possible to invest for positive social impacts and change, not just avoiding harmful industries.”

These investment funds use methodologies varying from positive screens through to impact investing, which aims to generate a measurable, beneficial social or environmental impact alongside a financial return.

“We are also seeing thematic funds that are positively tilted to particular industries, such as low carbon or more sustainable industries,” he notes.

Getting your super invested responsibly

Super fund members interested in responsible or ethical investment can often switch their super savings into an ethical or socially responsible investment option within their existing super fund.

It’s also worth noting many super funds are becoming more active as responsible investors. They are increasing their corporate engagement activities by voting on shareholder resolutions, holding direct discussions with boards to influence corporate behaviour and divesting shares if the company fails to respond.

“People need to join the dots and realise they have become part-owners through their super fund of the companies it invests in,” says O’Connor.

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36.