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Recent years have seen a surge in interest in socially responsible or ethical investing, both in Australia and globally, coinciding with widespread concern around environmental and societal and governance (ESG) issues. Advisers are likely to find an increasing number of clients want to invest in a way that reflects their ethical and environmental stance. 
In BetaShares’ 2019 ETF Investment Trends Report, only 16% of investors said it was of no importance that their investment portfolio contains companies with good environmental standards, with 29% saying it was ‘very important’ or ‘extremely important’.
Financial planners are responding to this demand. In the 2019 report, 34% of planners reported providing advice on responsible investments, up from 19% just two years previously.
Two important questions to consider prior to making an ethical investment are: 
How do I know I’m really buying a responsible or ethical investment?
Does responsible investment come at the cost of financial performance?


The Responsible Investment Association Australasia (RIAA) defines responsible investing (RI), also known as ethical investing or socially responsible investing (SRI), as ‘a holistic approach to investing, where ESG and ethical issues are considered alongside financial performance when making an investment. 
The Global Sustainable Investment Alliance (GSIA) details seven responsible investment strategies employed by fund managers. These strategies vary in the degree to which responsible considerations influence the investment approach. For example, some RI strategies can be said to seek to ‘avoid harm’, whereas others actively look for investments that target a positive social or environmental impact. Fund managers typically employ a combination of strategies.
ESG integration:
  • Involves the systematic and explicit inclusion of ESG factors into the investment decision-making process; and
  • Most popular RI strategy in Australia. 
Corporate engagement and shareholder action:
  • Refers to the use of shareholder power to influence corporate behaviour, for example by engaging directly with senior management or boards, and proxy voting in accordance with ESG guidelines.
Negative/exclusionary screening:
  • Involves the systematic exclusion of certain sectors, companies or practices based on specific ESG criteria, such as filtering out specific industries, sectors, or companies involved in gambling, alcohol, tobacco, weapons, pornography or animal testing; and 
  • Most popular RI strategy globally.
Norms-based screening:
  • Investments that do not meet minimum standards of business practice are excluded.
Positive/best in class screening:
  • Investments are included in a portfolio based on specific ESG criteria such as the goods and services a company produces, for example if a company derives greater than 20% of its revenue from sustainable technologies, products and services.
Sustainability-themed investing:
  • Investments are made in themes or assets specifically related to improving social or environmental sustainability, such as clean energy.
Impact investing:
  • Investments targeted specifically to address social or environmental issues while also creating positive financial returns for investors; and
  • Linked to community investing, which directs capital specifically to traditionally underserved individuals or communities.
Table 1 sets out these seven strategies along a spectrum illustrating, in broad terms, where each strategy sits on a spectrum from ‘traditional investment’, with little or no regard for ESG factors, to philanthropy.
Ethical investors are increasingly insistent their money is being invested in a way that aligns with their values, rather than just ethical in name.
Interpretations of ‘socially responsible/ethical investing’ can vary widely, and just because an investment manager declares they are implementing responsible investment, or a fund has the word ‘responsible’ or ‘ethical’ in its name, doesn’t necessarily mean they will meet the standards of all ethical investors. 
For example, some ‘ethical’ funds avoid investing in ‘pure-play coal companies’ but may still hold major coal producers such as BHP and Anglo American, on the grounds that they are ‘general mining’ companies rather than ‘coal miners’.
Some investors may be comfortable with this, but for others such exposure would be inconsistent with their principles. 
The RIAA runs a ‘Responsible Investment Certification Program’ which aims to help investors navigate these complexities to find investment options that match their beliefs and personal values.
If an investment product has been certified by the RIAA it means it ‘has implemented a detailed responsible investment process for all investment decisions, clearly discloses what that process is, has been audited by an external party to verify the investment process, and has met the strict disclosure requirements of the program’.
Another useful resource offered by the RIAA is a tool that enables investors and their advisers to search for certified funds according to particular values or interests that are important to them.
An investor can select two themes from a list that includes:
  • Social and sustainable infrastructure;
  • Sustainable land and agricultural management;
  • Healthcare and medical products; and
  • Renewable energy and climate change solutions.
  • The investor can also select the top two issues they want to avoid, such as:
  • Gambling;
  • Fossil fuels;
  • Pornography;
  • Animal cruelty; and
  • Tobacco.
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Some investors historically have believed that they had to choose between principles and performance, that giving priority to ethical considerations meant trading off financial returns.
The RIAA’s research does not bear this out. As at 31 December, 2018, Australian RI share funds surveyed outperformed mainstream Australian share fund benchmarks for all periods except the three-year term. International RI share funds surveyed outperformed the Morningstar average mainstream international share fund over every time horizon (noting however they underperformed the global benchmark for all periods except the three-year term).
Socially responsible investing has proven financially rewarding in recent years, with the myth that responsible investing means sacrificing financial performance being dispelled by performance statistics for both Australian and global ethical funds. 
Richard Montgomery is investment communications manager at BetaShares.

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