RI Explained

Good investors have long known that there is more that drives investment returns that just what is reported in financial reports.

 

Responsible investors all understand that companies or assets won’t thrive whilst ignoring environmental issues (pollution, climate change, water and other resources scarcity), social issues (local communities, employees, health and safety), corporate governance issues (prudent management, business ethics, strong boards, appropriate executive pay) or ethical issues.

 

In formal terms, responsible investment is a process that takes into account environmental, social, governance (ESG) and ethical issues into the investment process of research, analysis, selection and monitoring of investments.

 

There is a broad array of methods that responsible investors use to manage these non-financial risks – from excluding companies involved in controversial industries, to supporting the most sustainable companies, to a sharp focus on ESG risks, and using ownership to engage with companies.

 

This diversity of approach is a plus for the public who can find an option that matches your own values, concerns, risk profile and life stage.

Responsible Investment Approaches

The responsible investment sector is one of huge diversity, whereby a plethora of investment approaches are used, all in addition to fundamental financial analysis. Increasingly, investors are using a combination of approaches listed below.

 

We now have fund managers and super funds who apply environmental, social and governance integration, screen companies (e.g. tobacco), use sustainability themed investments (e.g. clean energy funds and green property), engaging actively with companies and making impact investments whilst also generating strong financial results.

Best-in-class screening
Best-in-class screening: investment in sectors, companies or projects selected from a defined universe for positive ESG performance relative to industry peers.
Corporate engagement and shareholder action
Corporate engagement and shareholder action: employing shareholder power to influence corporate behaviour, including through direct corporate engagement (i.e., communicating with senior management and/or boards of
companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.
ESG integration
ESG integration: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into the investment decision-making process.
Impact investing
Impact investing: investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
Minimum-standards (norms-based) screening
Minimum-standards (norms-based) screening: screening of investments against minimum standards of business or government practice, for example as based on international norms such as those issued by the UN, ILO, OECD and NGOs (e.g. Transparency International) and may include exclusions of investments that are not in compliance with norms or standards or over and underweight.
Negative/exclusionary screening
Negative/exclusionary screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria, such as what goods and services a company produces, or how inadequate a company or country response is to emergent risks such as climate change impacts.
Positive/inclusionary screening
Positive/inclusionary screening: the inclusion in a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria such as the goods and services a company produces, or how well a company or country is responding to emergent opportunities such as the roll out of low and zero carbon energy assets.
Sustainability themed investing
Sustainability themed investing: investment in themes or assets and programs specifically related to improving social and environmental sustainability (e.g. safe and accessible water, sustainable agriculture, green buildings, lower carbon tilted portfolio, community programs).

Responsible and Ethical Investment Spectrum

RIAA’s Responsible and Ethical Investment Spectrum maps out the various approaches to responsible investing, their similarities, differences and areas of focus.

 

For example, while some responsible investment approaches are oriented around managing environmental, social and governance (ESG) risks, other approaches focus more on pursuing ESG opportunities.  While most responsible investments will target market-rate financial returns, some impact investments will intentionally deliver below market-rate returns in order to maximise the social or environmental impact. The Spectrum also highlights the intentionality that different responsible investment strategies demonstrate towards ‘impact’ such as whether they focus on avoiding harm to society and the environment, or actively contribute to positive solutions for underserved people or the planet.

 

Please note that this Spectrum is only intended as a guide to understanding different responsible investment approaches and their features and that the boundaries defining each strategy are not set in stone, open to varying definitions, interpretations and executions.

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