Companies face increasing pressure from consumers and shareholders to ensure that the investments they make are ethical. But how do they define what is ethical?
Globally, ethical investing is on the rise. According to the Responsible Investment Association Australasia (RIAA), approximately $1 billion of the $2.24 billion in funds under management is classified as responsible. This is not just because Australians are increasingly aware of the impact their investments can have, but also because responsible or ethical investing is really starting to pay off. Sustainable, environmentally friendly and socially responsible businesses often make essential contributions to our future. Through pensions, banking and stocks, people actively invest their funds in such ventures.
Unfortunately, there is no uniform indication of what constitutes “ethical”. There are also no regulations to clarify what ethical investing is as a basic standard. So you have to navigate marketing.
Ethical screening is usually carried out by fund managers and financial advisers. So, for example, in the case of an ethical pension fund, fund managers will establish their ethical expectations and screen potential companies on that basis. Similarly, an ethical financial adviser will have a broad vision of what he deems ethical, while taking into account the specific needs of his clients. If you are investing independently, it will be up to you to decide what is non-negotiable and what is acceptable.
To give you an idea of how large pension funds and ethical investment firms decide what is and is not ethical, here is a list of ways their investments might be screened.
It’s not foolproof yet, but it’s a start.
Negative screening
The negative screening process involves subjecting companies to assessments on whether they invest in things that people generally consider unethical. If they produce an addictive product or service (tobacco, gambling), they have little chance of crossing the ethical threshold. Likewise, if they engage in poor labor practices, they may be dropped from the list of potential investments.
Screening negative is a good starting point for deciding what you will or will not invest in. If you’re adamantly anti-tobacco, you obviously don’t want your investment portfolio to include a company that manufactures cigarettes.
Positive screening or “best-in-class”
This involves looking for companies that have good social and ethical values, such as a zero-carbon policy, a mixed board of directors, and exemplary treatment of staff in the production of goods and services. Essentially, they make a profit doing the right thing.
Ideally, they do everything right, but depending on who is filtering, they might only need to meet one or a few items in the criteria to make the cut.
Companies that perform well in a positive screening process often make a tangible difference in terms of environmental or social outcomes. And, in a perfect world, it’s also a good investment. This could include sectors such as health, education and renewable energy.
All super funds, managed funds and exchange traded funds managers will do some form of screening, but filters vary so you may also need to apply your own ethical lens to see if this is right for you.
Minimum standards or “standards-based” screening
This approach uses the minimum standard of corporate, governmental or international standards. The minimum standards depend on the filter to which they are subjected. So, for example, they can be assessed based on the ten principles of the United Nations Global Compact. These principles are based, in part, on the Universal Declaration of Human Rights.
The principles cover topics such as:
Human rights (failure to respect human rights violations)
Labor (recognition of the right to collective bargaining and elimination of compulsory labor and child labor; elimination of discrimination)
The environment (precautionary approaches to environmental concerns, environmental responsibility and development of environmentally friendly technologies)
Anti Corruption
Depending on the fund, or the financial product, specific filters will be applied. For example, Verve Superannuation applies specific gender equality screening. It could be important for you. Alternatively, if you are looking for vegan and animal-friendly investments, you are looking for a specific screen layer. Ethics are personal and therefore no widescreen is likely to match your ethical goals.
Sustainable investment
This is a specific environmental approach, and it means actively seeking funds or investment opportunities in drinking water, renewable energy, infrastructure, recycling, waste management programs, etc. .
Environmental, Social and Governance (ESG) Investing
ESG covers the principles of environmental, social and governance selection. If that’s the screen you’re using, you might have to dig a little deeper to see how good a company’s governance is. This can mean a lot of time and effort on your part: reading company reports, understanding the financial situation, and continuing to follow company activity once you have invested.
Because ESG covers these broad general areas, it allows companies to claim they meet ESG criteria when in fact it is a regular business where people receive the nominee salaries and there there is a recycling bin next to the printer. . Maybe they report on sustainability at their annual general meeting, but there’s potentially little real change going on. That’s not to say there aren’t companies with a big commitment to ESG, but you need to be comfortable with their stance on what is a huge spectrum.
Impact Investing
If you choose impact investing as your primary screen, you’re ultimately looking to see the physical results of your investment. This could take the form of transport and infrastructure improvements, schools or hospitals.
Similarly, the impact could be improved social outcomes locally or internationally. Either way, you’ll be looking to get a return on your investment while still being able to see real results.
If you don’t know where to start, an ethical financial advisor can help you strategize. The cost of personalized advice can be prohibitive, which means you may need to do your own research. The first step might be to call your pension fund and find out where your money is invested. If they can’t tell you, look for funds that can offer more transparency, so you can examine the contents of the portfolios and how they align with your values.
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This is an edited excerpt from The Ethical Investor by Nicole Haddow, published by Nero and available now