WHAT IS
RESPONSIBLE INVESTMENT?

Responsible investment is an umbrella term used to describe an investment process which takes environmental, social, governance or ethical considerations into account. This process stands in addition to (or is incorporated into) the usual fundamental investment selection and management process.

There are a range of terms used today to describe the products or services available for people who want to invest in line with their values. Many of these terms will be familiar such as ethical investment, green investment, sustainable investment, socially responsible investment, clean technology investment or “SRI”.

RIAA uses responsible investment as the overarching term to refer to the “family” of products and services which take environmental, social, governance or ethical issues into account.

HOW DO RESPONSIBLE INVESTMENT PRODUCTS DIFFER?
Responsible investment products differ from other investment products because they systematically take environmental, social, ethical or governance considerations into account when making investment decisions.

Responsible investment products can differ from each other in the way in which they take these issues into account. Typically a responsible investment product will manage environmental, social, governance or ethical issues using one or more different practices.

WHAT DOES THIS MEAN FOR ME?
It is important when making your choice about a responsible investment product or service that you understand how it takes environmental, social, governance or ethical issues into consideration and that it meets your financial needs.

You may wish to avoid certain industries, such as tobacco or alcohol, or you may wish to seek out ones that you are keen to support, such as clean technology. Alternatively, you may be happy to have your funds invested across all industries as long as your money is supporting the companies that are leading in terms of sustainable business practices.

Click here to learn more about the different approaches fund managers and super funds can take to create their responsible investment products.

You can also learn more about the investment approaches used by certified fund managers and certified super funds by viewing their detailed certification profiles found in the section on our website called "Who's Certified?"

If you do not already have a financial adviser, you may wish to see one who is trained in providing responsible investment advice. Click here for a list of advisers who are members of RIAA or click here for a list of advisers who have undertaken our training course and are certified by RIAA.

DIFFERENT APPROACHES
TO RESPONSIBLE INVESTMENT

There are a number of different investment methods, or guidelines, that fund managers use when evaluating the environmental, social, governance or ethical practices of the organisations in which they want to invest.

These are:

Negative screening;
Positive screening;
Sustainability analysis;
Best of sector.

Every fund is different, and so understanding these methods will help you to determine the style that best matches your own level of concern about environmental, social and ethical issues.

Negative screening
Some funds simply avoid investing in certain industries, such as tobacco, armaments, alcohol or gambling but will invest in everything else.

Positive screening
Some funds actively seek out companies which have a positive impact on society and the environment. This may be a company solely devoted to renewable energy or healthcare, but on the other hand it might be a mainstream energy company with above average environmental, ethical and social practices.

Sustainability analysis
Sustainability analysis is the quantitative and qualitative study of all companies on the stock market to determine their environmental, social, governance or ethical performance. This method is often combined with positive and / or negative screening but can be used on its own.

Research techniques for sustainability analysis are many and varied and can include:

• incidents reported in the media
• research reports provided by stockbrokers
• specialist research based on corporate conduct provided by NGOs
•  

• one on one interviews with the company
• questionnaires filled out by the company
• analysis of the company's sustainability report
• rating companies against international benchmarks such as the UN Declaration on Human Rights

Best of sector
Best of sector funds will invest in all industries (with no negative screening) but choose only those companies which are considered to be the most socially and environmentally responsible out of their peer group. The belief here is that all industries must strive toward sustainability, including those industries which some people may consider to be harmful.  Sustainability investing chooses leaders in each sector based on their progress in taking their industry to a more sustainable future. This approach is based on the premise that companies with strong sustainability credentials are generally better managed companies, and therefore more profitable in the long term.  

Engagement
Some funds will actively engage with the companies in which they invest to seek improvement on environmental, social and governance issues if their research indicates a lacking in these areas.

Sometimes these funds will collaborate on common issues with other funds from Australasia or across the world, which can increase the likelihood of a positive outcome from the engagement process.  For example, several large superannuation funds across the world have targeted US car manufacturers which are purchasing their steel from Brazilian mining companies known to be using bonded labour.

Voting rights and resolutions
Voting rights are a powerful mechanism to achieve improved corporate social responsibility.  Funds which are active owners will exercise their right to vote and their right to raise resolutions in order to achieve better management outcomes from the companies they invest in.  Even environmental and social resolutions which attract less than majority support can still capture the attention of a corporate board and affect change. For example, it was an environmental resolution raised by a group of nuns and gaining support of 24% which inspired GE to undertake its huge environmental initiative called EcoImagination. In the United States resolutions concerning environmental and social issues are increasing every year, and that trend is moving across the world.

Most commonly, a fund will combine elements of the different approaches to create their own particular style, so it's worth taking the time to identify with a fund's approach. How proactive you want your fund to be is up to you.