Socially responsible investing is also known as social investment or investing in ESG funds. It is investment choices considered as socially responsible based on the type of business or asset and its type of operation.
As the world continues to shine the spotlight on a sustainable future, there is an increase in the number of future-focused companies in areas like renewable energy, social diversity and inclusion organisations and those committed to good business practices.
What is socially responsible investing and ESG funds?
Socially responsible investing would explore funds related to the environment, social endeavours and governance (ESG). ESG investment opportunities provide ways for investors, brokers and fund managers to contribute to entities that intend to stimulate change in the environment, socially or through good governance initiatives.
Investors don’t only look for financial returns but want to make a positive impact by investing in the future.
Principles of responsible investing
Responsible investing principles are based on good corporate behaviour by proactively engaging in environmental, social and governance issues.
Environment
Environmental principles focus on preserving natural resources and sustaining our natural environment. Companies would focus on renewable energy, clean technology, climate change and waste management.
Social
Social principles focus on initiatives that drive social change. They focus on people. Examples of these companies include community initiatives, human rights, ethical product practices and diversity-focused organisations.
Governance
Governance-based businesses focus on the standards of running an organisation in areas like anti-corruption, organisational culture and whistler-blower projects.
ESG and responsible investing reporting
Although ESG or socially responsible investing reporting is not yet mandatory, the regulators like ASIC (Australian Securities and Investment Commission), APRA (Australian Prudential Regulation Authority) and ASX (Australian Securities Exchange) are recommending and, in some cases requiring, that organisations consider socially responsible investment options.
Sustainability reporting requirements are already compulsory for some specific industries based on headcount or organisational structure. As financial planners, we are encouraged to follow responsible investing guidelines.
ESG investing strategies
The Harvard Business School (HBS) outlines these ESG investment strategies to consider:
Negative Screening
When making an ESG investing decision, certain criteria and investment goals must be outlined from the start. The process of screening companies based on these predetermined criteria and goals is called negative screening.
Positive Screening
Positive screening is the opposite of negative screening. This strategy involves pre-defining a list of best-in-class characteristics you’d look for in a business. Per the example provided by HBS, you may invest in the ten apparel companies with the lowest carbon footprint or the five appliance companies with the most diverse boards of directors.
Portfolio Tilt
A portfolio tilt strategy is generally a low-risk investment strategy. It prioritises ESG goals, and the investor ’tilts’ the percentage of ESG investments in a portfolio to be more than non-ESG investments while maintaining sector weights that match a target index.
ESG Integration
This strategy involves analysing how a business has integrated ESG. It looks at how a company weaves high material ESG into the fabric of its day-to-day business operations.
Shareholder Action
This strategy involves the shareholders directly, where they encourage the businesses they invest in to pursue ESG opportunities and applications. According to their research, HBS investors increasingly view corporate attention to ESG issues as closely linked to business resilience, competitive strength and financial performance.
Activist Investing
This ESG strategy requires the investor to proactively affect a company’s ESG position or rating by buying into its ESG adoption programs.
Sustainability-Themed Investing
This ESG strategy involves proactively seeking business investment opportunities across an index of companies based on a specific ESG theme like diversification strategies, a renewable energy focus or anti-corruption support.
Risks of ESG investing
One of the most significant risks associated with ESG and responsible investing is greenwashing. Greenwashing happens when a company positions itself as being more ESG friendly and compliant than it is.
The ASIC and the ASX are acutely aware of greenwashing practices and are investigating ESG disclosure statements to ensure they comply.
ESG investing is a relatively new concept and investment strategy. We encourage you to chat to our financial planners for the best advice on ESG investing and which strategies would work best for you. Contact us to make an appointment.
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