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Guide to Ethical Investment: Responsible Investing Explained, Simply

Article By Adam Camac | | General News

Increasingly, investors don’t just want to make money, they want to make a difference. Thankfully these goals are not mutually exclusive.

More and more investors are deciding to put their money into ethical and sustainable investments, moving this practice—known collectively as Responsible Investing—from the fringe to the mainstream.

Many fund managers now have investment products committed solely to sustainable practices and responsible investments.

A new focus, with new jargon

Like any new area in business and investing, it comes with a raft of new jargon. It can make it hard to know what you are investing in when you’re confronted with similar terms including:

●      ethical investing

●      environmental, social and governance (ESG) criteria

●      socially responsible investing

●      sustainability investing

These terms can mean different things to different people.

The Responsible Investing spectrum

With all this similar-sounding terminology being bandied about, a good approach for gaining context and assessing investments is to view Responsible Investing as a spectrum from “deep green” to “light green” products. This allows you to invest according to your level of conviction:

Positive Screens vs Negative Screens

As part of the process of deciding where investment options sit on this spectrum, Positive and Negative Screening is used as a filter:

●      Positive Screens are where the investment manager looks to identify companies that have a positive social or environmental impact

●      Negative Screens are where the investment manager actively avoids companies, sectors and even countries that have a negative social impact, such as gambling, tobacco, pornography and mining.

3 Methods of Classifying Responsible Investments

Responsible Investments are generally classified using three methods shown on the vertical axis of the diagram above:

  1. Ethical Investing
  2. Socially Responsible Investing
  3. Sustainable Investing

Within each of these three methods, an investment manager might use Negative and/or Positive Screens to further assess the investments.

Let’s look at each of these 3 methods in turn…

  1. Ethical Investing: Generally both Negative and Positive screening is used for Ethical Investing. The screening is stricter and emphasises positive screening. This often results in a portfolio with exposure to areas such as education or healthcare.

    Depending on the level of conviction and application of filters, this process could result in a company being excluded not due to a negative screen, but because it lacks a positive impact and is therefore considered neutral.

    This exclusive use of positive screens is known as Impact Investing because it focuses on businesses with a distinct social or environmental purpose such improving social outcomes, or on developing renewable energy.

    These are ‘deep-green’ investments on the Responsible Investing spectrum, and due to the extra screening requirements can often be more costly.
  2. Socially Responsible Investing: When applying this method, investment managers might screen out companies if they take part in excluded activities, but might consider including such a company if their commitment to social responsibility outweighs the negative aspects.

    For example, Woolworths recently transferred its ownership of liquor stores and pubs/clubs (which receive substantial income from gambling/poker machines) to a separate company (Endeavour Group  – EDV), in order to appear as a more ethical choice for investors. However, Woolworths currently owns a substantial portion of Endeavour Group. Therefore some investment managers might choose to screen out Woolworths completely, whereas others might decide to include a company like this if the ‘negative screen revenue’ accounts for less than 5% or 10% of profit.

     These ‘mid-green’ investments are in the middle of the spectrum and generally cost less.
  3. Sustainable Investing: Investments here are chosen on the basis of how well a company manages environmental, social and corporate governance (ESG) factors, not on what the company makes or sells.

    Investment managers review a company and determine how well it’s run and how it manages the environmental and social impacts of activities, rather than just looking at ethical factors.

    The thinking here is that companies that do less harm, look after their staff and are well managed will provide better returns in the long run.

    These ‘light green’ investments on the spectrum are starting to be included by many investment managers as part of their regular process to screen companies even if they are not positioning themselves in the ethical/socially responsible investment space.

Who determines which screening method is ethical?

In Australia the Responsible Investment Association Australasia (RIAA) is the peak body and has created a certification program with a view to creating uniform standards of disclosure for funds.

To gain certification, investment managers must demonstrate to the RIAA that they use a specific methodology to weed out unethical behaviour. The process is then independently verified by an accounting firm. Funds that qualify can then display the RIAA certification symbol.

A second criteria that may also be used is the UN Principles for Responsible Investment ( which has 6 core principles around ESG and the investment/research process when looking at companies for investment purposes.

What about investment performance?

Excluding profitable companies from your investment selection using the Responsible Investment filters and screens does not necessarily mean reduced returns.

A number of international studies have shown that Responsible Investing does not have to be costly and can aid performance. A report by Deutsche Asset & Wealth Management and Hamburg University on over 2000 empirical studies found a strong correlation between implementing good environmental, social and governance (ESG) principles and sound financial performance.

The reasoning is that companies with good ethical, social and governance (ESG) policies make better investments long term, because they avoid legal and environmental disputes, and have a better focus on reducing waste which cuts costs.

How can you apply the Responsible Investing spectrum?

Selecting the investments that are the right mix for your ethical and financial needs depends on which factors are most important to you.

As part of your overall financial planning strategy, your Altitude Financial adviser has the flexibility to include Responsible Investing into your investment and/or super portfolio, either as part of a regular portfolio or within an investment portfolio that has a 100% focus on ethical and socially responsible investing.

All managed funds within the Responsible Investment Portfolio are certified and approved by the RIAA or UNPRI.

If you’d like to discuss how your investments can make a positive impact as well as a positive return, get in touch with us and make a time to discuss your options and where you’d like your investments to sit on the Responsible Investing spectrum.

Altitude Financial Planning is a Corporate Authorised Representative of Altitude Financial Advisers Pty Ltd

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