There is no doubt that interest in responsible investments is growing. Not only in Australia but globally, investors are increasingly interested in how a company makes its money not simply how much it makes.
Whilst some investors may focus on the longer-term viability of a company and its behaviour, others may hold particular values they want their investments to mirror. How these two strategies play out in the investments context can be different.
This is not a new idea
Today, many investment managers use environmental, social and corporate governance (known collectively as ESG) knowledge and data. It can help to inform the analysis of risk, innovation, operating performance, competitive and strategic positioning, and quality of management, corporate culture and governance and to enhance financial valuation, portfolio construction, engagement and voting practices.
Examples may include a company’s interactions with the environment, such as water and air pollution, social factors like employee diversity or safety standards, along with the company’s governance structure, such as how the board is composed and compensation structures. This approach seeks to add value or manage risks through broader, more comprehensive investment analysis, decision-making and engagement with companies.
This approach is providing measurable results
Investor-led initiatives have resulted in change at some of the world’s biggest companies. For example, last year investors successfully influenced oil and gas company, Exxon, to be more open about the effects of climate change on its business, by improving is disclosure of climate-related risk.
In December, engagement provider Hermes EOS, who advocates for change in global companies on behalf of investors, released its key themes for engagement in 2018, which included climate change, diversity, remuneration and human rights. Focusing on ESG issues allows investors to make a positive impact, or at least encourage the companies they invest in to make these changes.
There are opportunities for everyone
For retail investors, navigating the world of responsible investment can be complex, terms like ethical, sustainable and impact investing are often used interchangeably by investors seeking to ensure that their money is invested in companies or funds that mirror their values and beliefs. In reality, these terms each related to a specific type of responsible investing – depending on what the investment is trying to achieve.
Arguably, the most well-known responsible investment strategy amongst retail investors is ethical investing. This strategy’s primary purpose is to exclude certain industry sectors, companies, practices or even, at times, and countries that meet specific criteria from a fund or portfolio, based largely on the client’s preference not to be invested in these activities. Traditional ethical investment strategies seek to avoid issues like tobacco, weapons, gambling, and pornography, however, investors are increasingly interested in strategies that avoid sectors linked to climate change or human rights abuses.
Sustainable investing, in contrast, is a type of responsible investing that considers ESG issues in an investment, alongside standard financial measures when assessing a company’s performance. This might include how a company approaches employee relations, executive remuneration and anti-money laundering legislation, how it manages strategic issues such as climate change, or how it manages corruption.
Sustainable investing as an approach that explores further to reveal broader risks and help to identify greater opportunities. It naturally lends itself to longer-term investment horizons and strategies. The attractive consequence of this approach is that as more investors use a sustainable strategy in their investment decision-making, more and more companies will be encouraged to behave sustainably and address ESG concerns and opportunities in their business.
You may also have heard about the rapidly developing field of impact investing. Impact investments preference the social or environmental purpose of an investment over or alongside its financial results. An impact investment should be aligned to creating a positive social or environmental impact, it cannot simply be a bi-product of business-asusual behaviours. Impact investments may target a specific social or environmental issue (think homelessness or renewable energy) or may be more broadly themed, for example focusing on businesses that have a measurable social impact across a range of areas (for example diversity, job creation or medical research). Whilst there are currently few opportunities to access impact investments for most retail investors, many people are attracted to the idea of investments that aim to deliver a positive outcome as an alternative, or complement to traditional.
What can retail investors do today?
While specific impact investments may be difficult to access for many investors, more traditional investments can still be used to make an impact. We know that that there are often factors outside of the standard measures of business and financial performance that can influence the viability of of a company from an investing perspective. Considering responsible investment strategies, allocating a portion of your funds to a dedicated sustainable or ethical option, or even personally investing in those companies known for involvement in social or environmental projects are all possibilities to consider and discuss with your financial advisors.