Responsible Investment Explained

Smart investors have long known that there is more that drives investment returns that just what is reported in financial reports.

They understand that companies or assets won’t thrive whilst ignoring environmental issues (pollution, climate change, water and other resources scarcity), social issues (local communities, employees, health and safety), corporate governance issues (prudent management, business ethics, strong boards, appropriate executive pay) or ethical issues.

Responsible investment, also known as sustainable or ethical investment, is a broad-based approach to investing which factors in people, society and the environment, along with financial performance, when making and managing investments.

Examples of responsible investing vary broadly and could include:

– divesting from a company with a poor human rights record

– engaging with a company included in an investment portfolio around its exposure to carbon intensive industries

– making an investment in a program or social enterprise that is focused on tackling a pressing social or environmental issue

– analysing and selecting a portfolio of companies to invest in based on their overall environmental, social and governance performance

Investors engage in responsible investing for a range of reasons including: to align investments with their own or their clients’ personal values and ethics; to reduce risk; and to achieve strong financial returns in the short and long term.  All kinds of investors can be responsible investors, whether they are individuals choosing where to put their savings or superannuation; a trustee of a trust or foundation; or an institutional investor such as a super fund, fund manager, bank or asset manager.

Responsible Investment Approaches

The responsible investment sector is one of huge diversity, whereby a plethora of investment approaches are used, all in addition to fundamental financial analysis. Investors typically use a combination of approaches listed below.

Global alignment on definitions of responsible investment approaches

Global regulators have called for industry standard setters to develop common terms and definitions to ensure consistency throughout the global asset management and wealth management industries, in a manner that contributes to efforts to eliminate greenwashing.  

In 2023, RIAA worked with the UN Principles for Responsible Investment, the CFA Institute, and the Global Sustainable Investment Alliance to create global industry guidance that aims to enhance clarity and consistency in the language used within responsible investment, specifically on:

• Screening

• ESG integration

• Thematic investing

• Stewardship

• Impact investing

Responsible and Ethical Investment Spectrum

RIAA’s Responsible and Ethical Investment Spectrum maps out the various approaches to responsible investing, their similarities, differences and areas of focus.

For example, while some responsible investment approaches are oriented around managing environmental, social and governance (ESG) risks, other approaches focus more on pursuing ESG opportunities.  While most responsible investments will target market-rate financial returns, some impact investments will intentionally deliver below market-rate returns in order to maximise the social or environmental impact. The Spectrum also highlights the intentionality that different responsible investment strategies demonstrate towards ‘impact’ such as whether they focus on avoiding harm to society and the environment, or actively contribute to positive solutions for underserved people or the planet.

Please note that this Spectrum is only intended as a guide to understanding different responsible investment approaches and their features and that the boundaries defining each strategy are not set in stone, open to varying definitions, interpretations and executions. The RI Spectrum was updated in April 2024. Click here to download the PDF.