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What is ethical or sustainable investing?

Do you carry a Keep-cup to cut waste, or have solar panels to help tackle climate change?

Did you know you can potentially have a more significant impact on the planet with how you invest your money?

Known by a variety of different terms, ethical, sustainable or responsible investing is a broad-based approach to investing which factors in people, society and the environment, along with financial performance, when making and managing investments.

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.

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.

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 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 main approaches that investment managers use to invest responsibly are:

Negative screening
Positive screening
ESG integration
Company engagement & shareholder action
Impact investing

Negative screening is the simplest, and most traditional method, of investing sustainably. 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.

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

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This is the most basic form of responsible investment. 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 a superior environmental performance, and treats its employees well.

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.

When no action is taken, or companies’ replies aren’t sufficient, an investor can choose to file a resolution. If enough big 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 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

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