Lets explore a few of most compelling reasons to invest responsibly below.
- Competitive and Sustainable Returns
- Help the Environment
- Hold Companies Accountable
- Put Your Money Where Your Mouth Is
Many responsible investments have proven they can deliver performance in line with the very best managed investments in the world, while helping to bring about positive change in society.
There is now substantial evidence and research in Australia, New Zealand and internationally, to support the argument that RI performs on a par with, if not better than, the broader investment market.
The old misconception that investing in accordance with what matters to you personally will mean sacrificing returns is no longer credible.
Savvy investors are also seeking out the sector not necessarily because of their personal convictions but because it includes forward-looking investments with excellent potential for future growth: the clean energy sector, better healthcare services, mass transport or education.
Why? Because events in our natural world and in our economy show us environmental and social issues impact directly on the performance of companies. Adopting a responsible investment approach is about ensuring you are minimising your exposure to the financial risks increasingly associated with climate change, changing energy needs, poor ethical and governance practices, water shortages or exploitative labour practices.
In the future it’s likely those companies that fail to manage their environmental and social risks will perform poorly. Those that pay close attention to these issues and are committed to sustainability will be able to tap into investment opportunities.
For example, the end of cheap oil, and the depletion of reserves will lead to higher oil prices, favouring companies that can supply competitive energy alternatives and localised energy security. The need to transfer large volumes of water from water-rich to water-scarce areas will benefit companies specialising in the financing, management and engineering of large pipeline and purification services.
Responsible investment is an excellent way to make a positive contribution if you are passionate about the environment and climate change.
In fact, preserving the natural environment and concerns about climate change are the most commonly cited reasons for people wanting to know their investments are working to improve the world for themselves and for future generations. RI is a way to ensure your money is directed toward companies that are making a positive impact on the environment and on society and away from those that cause harm.
The desire for environmental sustainability and a green future is now irrefutably mainstream. Savvy investors are already factoring the consequences of policies like carbon trading into their assessment of a company’s future value. And many of the world’s best business leading managers companies are already prepared for a low-carbon future.
“We think green means green. This is a time period where environmental improvement is going to lead toward profitability. This is not a hobby to make people feel good.” Jeffrey R. Immelt, Chairman and CEO, GE
Although there is much debate about by governments as the best ways to lessen the impacts of climate change, those solutions will have an impact on the profitability of companies all around the world. Companies who emit carbon will likely pay for their pollution levels, and those who are helping to reduce carbon, such as renewable energy and energy efficient companies, will be provided with attractive financial benefits, competitive advantage, efficiency savings, reputational benefits and employee loyalty and incentives.
“As governments attempt to impose market-based and other initiatives to move to a low-carbon economy, it is expected that there will be financial winners and many financial losers.” Greg Liddell, Director, consulting and advisory services, Australasia, Russell Investments.
By channelling your investment dollar towards funds and companies that have positive climate change and environmental management practices, you are directly encouraging positive corporate behaviour.
“This used to be controversial, but the science is in and it is overwhelming……We believe every company has a responsibility to reduce greenhouse gases as quickly as it can.” Lee Scott, CEO, Wal-Mart.
VALUES AND ETHICS ARE BACK IN THE LIMELIGHT.
The Global Financial Crisis (GFC) has had a devastating effect on individuals and communities worldwide, and has led investors to demand greater accountability from the companies they invest in. By adopting a responsible investment strategy you can make your voice heard on corporate responsibility issues that concern you.
Public anger at the excesses of banks and large corporations is evolving into a widespread public belief that companies and financial markets need to rebuild with an improved regulatory framework, improved ethics and governance standards, and address the short-term preoccupations which led to the Global Financial Crisis.
Addressing the investment risks associated with environmental, social, governance and ethical issues is now seen as being crucial to achieving an economic recovery that is about real and enduring change.
As a result there will be more pressure placed on companies to explain how they are dealing with key social and environmental challenges. Responsible investors can ensure their voices are heard by investing in companies already systematically addressing issues such as:
The rise and rise of corporate social responsibility has been driven by many factors, but none so powerful as the wake up calls experienced by companies who have been exposed for their harmful activities.
20 years ago the New York Times revealed the exploitative labour practices of Nike’s suppliers in Indonesia leading to a prolonged and high-profile consumer and activist backlash.
We’ve seen growing public pressure on pharmaceutical companies to provide cheaper drugs to poorer nations. Witness the extraordinary events of the Pretoria Drug Trials in 2001 – when five of the largest pharmaceutical companies banded together to defend their patents on AIDS drugs. The result was reputational loss on a grand scale and big wins for AIDS treatment and for Africa.
With the rise in obesity, diabetes and heart disease, food manufacturing companies are now rapidly becoming the target of litigation and regulation to force improvements in the fat, sodium and sugar contained in day to day food items.
In the future, companies assessed as poor performers in the “corporate responsibility” stakes may pay a risk premium on debt, increasing the cost of their servicing requirements or even need to heavily discount equity offerings to attract investors. They will be stocks to avoid whereas those with strong corporate responsibility policies and practices will be deemed to be lower-risk with better prospects for future performance.
You may already be actively involved in social or environmental causes. Perhaps you work as a volunteer, belong to a special interest group or make donations to a particular cause. RI gives you a way to take this activism one step further.
You’re probably already aware that you can be an ‘activist’ by the choices you make as a consumer. You make choices on a daily basis about the energy you use, the car you drive or what groceries you buy. These choices are examples of ways you can use your money to support or withhold support for different companies.
Responsible investment gives you the opportunity to make similar choices with your super, savings and investments. You can choose to put your super in a responsible investment option. You can open a savings account with a socially responsible bank or take out a green loan for your car or home. When it comes time to plan your investments you can consult a specialist financial adviser and invest through specialist RI managed funds.
Direct investment through the share market gives you even more potential to influence the behaviour of companies. This is called shareholder activism. Large institutional investors, including specialist RI fund managers already have excellent track records for actively engaging companies they invest in to alter corporate behaviour.
RI fund managers from Australasia and across the world have collaborated on common issues. They have successfully engaged with the companies in which they invest to seek improvements on environmental, social or governance issues.
For example, several large super funds from around the world have targeted US car manufacturers. Their aim has been to raise awareness that those manufacturers have been purchasing steel from Brazilian mining companies known to be using bonded labour in the hope they can expose and change such practices.
On a much smaller scale as an individual shareholder you can use your voting rights and ask questions at annual general meetings in an effort to improve corporate responsibility.
As a shareholder you have an ownership stake in the company. By being an active owner of shares you can exercise your right to vote and right to raise resolutions to improve the management of companies you hold shares in. Even resolutions that gain minority support can attract the attention of directors and change corporate behaviour. For example, an environmental resolution raised by a group of nuns that gained 24% support inspired GE to undertake a full energy audit of the company, which then led to the launch of GE’s suite of environmental products and services called ecomagination.
RI in Action
James – Personal Trainer
He lives by these rules and promotes them on a daily basis to his clients.
James is against smoking and would like to ensure that his super doesn’t have investments in tobacco. By speaking to a financial adviser certified to give responsible investment advice, James is able to apply a negative screen to his investments, to exclude all investments which contain tobacco.
Sarah and Jake
Sarah, who is a botanist would like to ensure that their money is to going to companies that harm the environment, while Jake, a mechanic is concerned that by doing that they will sacrifice any returns they will make.
By seeing a financial planner, Sarah and Jake could employ a best of sector approach to their investments to ensure that they only invest in the companies that are the best in their sector as managing ESG issues and as such are actively seeking to reduce their environmental impacts, as well as reduce their risks and maximising returns.