Investment Strategy: How to action an ethical investment strategy

In Australia, interest in ethical investing (an investment method which looks to maximise financial and social returns) has continued to rise, but there are several ways to action your wishes.

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By Sally Campbell, Executive Director, JBWere

Ethical investing or Socially Responsible Investing (SRI) describes a strategy which combines an investor’s intention to maximise both financial return and social return. Ethical Investors focus on how companies handle Environmental, Social and Governance (ESG) issues. For example, investors may favour companies which are environmentally responsible, support workplace diversity, and increase product safety and quality over those that do not.

Domestically, interest in ethical investing has continued to rise with investments in core responsible investments growing by 51% during 2013 (2014 numbers are yet to be published) to over $25 billion and those following broad strategies increasing by 13% to $153 billion.

There are two main reasons why investors invest ethically:

  • To ensure companies they invest in align with their ethical standards; and
  • To invest in sustainable companies that will maximise financial return and social return in the long run.

There are many techniques used by ethical investors; however, according to the Global Sustainable Investment Alliance there are five major techniques. These techniques generally fall into two categories: Core responsible investing or Broad responsible investing.

Core Responsible Investment Strategies

  • Screening of investments – negative and positive screening
  • Sustainability-themed investing
  • Impact/community investing
  • Corporate engagement and shareholder action

Broad Responsible Investment Strategies

  • Integration of ESG factors into the overall investment decision making process

There are three main approaches investors have undertaken to implement an ethical investment strategy.

They include:

  • Investing in direct investments using ethical filters;
  • Investing in ethically-managed strategies; and
  • Investing in managed strategies and reviewing these strategies regularly to ensure there are no significant exposures to unwanted industries or companies.

Finding the right approach

The decision as to which approach is the most appropriate strategy for each investor will depend on a number of factors. These include:

  • the importance placed on ethical issues;
  • the balance between the desire to implement an ethical investment policy with the aim to maximise risk-adjusted returns; and
  • the potential time commitment required to undertake a more active direct investing strategy.

When it comes to what works best for each investor it may very well be that a combination of all three approaches across the asset classes. For example, in the case of Australian fixed interest and equities a direct approach may be appropriate, while a specific ethical strategy and traditional strategies are used across global fixed interest and equities.

If you are currently reviewing your ethical investment policy, or would like to, please speak to your adviser.

For a detailed explanation of how to action an ethical investment strategy, download the full article here: