What is "ethical and responsible" investing?

You can carry a Keep-cup to reduce waste, or you can install solar panels to reduce your reliance on fossil fuels. But did you know you can also choose to put your money into ‘ethical and responsible’ investment options?

Ethical and responsible investing allows you to choose how your money is invested, whether it’s with your superannuation or your savings. You can choose to avoid investing in industries you don’t like, while also supporting companies doing good.

It’s just smart investing. Responsible and ethical investors understand that there’s more to judging a company than only looking at its financial results. They consider environmental, social and governance performance, and ethics.

And it’s not just environmental issues like climate change. It’s social issues like minimum wage levels and how supply chains are managed. It includes how companies are governed, such as looking at how many women are in top levels of management, or whether there’s transparency into how much the CEO is paid.

And there’s more and more evidence that companies with strong corporate social responsibility and environmental performance also perform better financially. This is relevant for your superannuation fund, and any investments into shares or managed funds, but it’s also worth thinking about in terms of your bank and who they choose to lend money to.

The investment industry has evolved a lot in the past decade, and there’s now a range of ethical and responsible investment options to suit your preferences. The following are the main approaches that investment managers will use when building a portfolio of companies or investments:

Negative screening
This is the simplest, and most traditional method. It involves screening out industries, or individual companies so that the investors has no stake in them eg. Guns manufacturers, gambling, or a company like Adani which is working to build the Carmichael thermal coal mine in Queensland.

Positive screening
A positive screen is the opposite; it identifies companies who are doing good work and invests in them. eg. Renewable energy, health care, or a company like Tesla.

ESG integration
Investors who take an ESG approach will analyse a potential investment and consider different Environmental, Social and Governance (ESG) factors. They will then use this information to inform selection of companies and the ‘weight’ (amount owned) of a particular company in a portfolio, as well as how they engage with a company they are invested in eg. if an investor is going to invest in an oil company, an ESG approach will help find the oil company that has the a superior environmental performance, and treats its employees well.

Company engagement & shareholder action
Companies listen to their investors, particularly when they are big investors such as banks and super funds. These investors will have meetings with ‘engage’ with companies to discuss major issues that they feel the company can improve. If no action is taken, or companies’ replies aren’t sufficient, an investor can choose to file a resolution. If enough investors get behind the resolution it will be voted on at the company’s annual investor meeting and it could very well become part of company policy.

Impact investing
Impact investors seek out companies whose business operations are focussed on solving some of the world’s biggest challenges. These are companies that have impact at the core of their mission, and, they produce an impact report that measures their social or environmental impact. eg. Goodstart Early Learning, or Streat cafe

The thing that these processes have in common is that they all look beyond financial measures. Ethical and responsible investors recognise that the success of a business depends on much more than just revenue and expenses.

It’s your money, and you have the right, and the power, to make sure it invested in companies that you support.