Responsible investment is an umbrella term to describe an investment process that takes into account environmental, social, governance or ethical considerations. This approach stands in addition to or is incorporated into the usual fundamental investment process.
Whatever the approach, responsible investment is supported by deep research across a range of important issues and their consequences. This research is gathered from many different sources including the media, specialist research providers and broking houses, specialist ratings agencies, from environmental and human rights organisations, one-on-one interviews with target companies, questionnaires filled out by companies, analysis of company sustainability reports and published data on regulatory breaches and fines.
Let’s have look at some of the ways responsible investment is carried out.
ESG ANALYSIS
Environmental, social and governance (ESG) analysis is a process undertaken by mainstream investment organisations to determine the extent to which these issues will affect the risk and return of a particular company or investment opportunity. This research is then integrated into the traditional valuation process, asset allocation methodology or voting and engagement practices.
SUSTAINABILITY ANALYSIS
Sustainability analysis describes a process that takes these ESG risk and return issues into account, but also looks at the sustainability outcomes that the investment achieves.
NEGATIVE SCREENING OF COMPANIES OR SECTORS
This method avoids certain types of investments. Tobacco, armaments, alcohol, uranium, animal testing and gambling, or companies which have an adverse impact on the environment, are those most commonly identified. Negative screening allows investors to ensure their values are in line with their investments. For instance, some investors may specifically wish to avoid companies engaged in gaming. Others will draw the line at companies engaged in uranium mining or tobacco.
POSITIVE INVESTMENT IN SUSTAINABLE INDUSTRIES
Positive screening seeks out companies deemed to have a positive impact on society and the environment. This could include water and waste management, renewable energy, energy efficiency, sustainable agriculture, forestry and fishing, microfinance, mass transport, sustainable property, affordable housing, education, aged care and health care. Positive screening is an important tool for responsible investors who want their money to be used in business and industries that will benefit society and the world we live in.
BEST OF SECTOR
Best of sector funds invest in all industries, but choose only those companies considered to have the most successful environmental, social and governance performance out of their peer group. The guiding influence of this style is that all industries should strive toward sustainability and the management of environmental, social and governance risks including those industries considered to be harmful.
THEMATIC INVESTMENT
The economic and policy factors that are supporting a move toward sustainability have given rise to many new “thematic” funds which are designed to identify winners in the new Green Economy. The growth of this approach has been evident since 2007, when it accounted for 18% of all responsible investment portfolios. By 2009 thematic funds represented 26% of RI funds under management.
These “themed” portfolios concentrate on investments that adhere positively to a particular sustainability theme such as environmental technology, management of climate change risks, sustainable agriculture and forestry, water technology, waste management, sustainable property and infrastructure, human rights, microfinance or governance. This category also includes multi-strategy portfolios which may contain a variety of themes.
SHAREHOLDER ENGAGEMENT AND ACTIVISM
Some funds actively engage with the companies they invest in to seek improvements on their environmental, social and governance performance. This is another way in which responsible investors use their collective influence to seek positive outcomes at an organisational level.
Here an asset manager, asset owner or specialist firm will contact companies to build the business case for better management of ESG matters. Sometimes they will collaborate on common issues with other funds from the region or across the world which can increase the likelihood of a positive outcome from the engagement process.
Using shareholder voting rights is another powerful way to achieve improved ESG performance. It may be difficult to achieve a majority vote for resolutions based on environmental or social issues but a positive vote of about 15% or more is often enough to capture the attention of a corporate board and to affect change. Funds which are “active owners” will exercise their right to vote and their right to raise resolutions in order to achieve better management outcomes.
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 responisble investment framework which actively integrates ESG into their investment choices and ownership practices. Find out which Australian and New Zealand investment organisastions have signed the PRI.
Find out about the different products offered by fund managers, super funds and community banks.
LOOKING FOR CERTIFIED RI PRODUCTS AND SERVICES?
Find out more about fund managers and superannuation funds certified by RIAA. In addition to their contact details you will be able to read about how they manage their investment process, links to past performance and a full list of stock holdings.
