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To take responsible investing to the next level requires a holistic approach and investors should accept nothing less.
The conversation around responsible investing has seen a marked shift. Now, the talk is less about ‘do no harm’ and more about actively ‘doing good’.
This heightened sense of agency was apparent in 2021 when 60 per cent of Rio Tinto’s shareholders voted against executive pay plans after the company’s destruction of the culturally significant Juukan Gorge caves in Western Australia. It was also evident in April this year when Atlassian co-founder Mike Cannon-Brookes upped his stake in AGL to 11.3 per cent, in an effort to thwart the energy company’s plans to demerge – a move he saw as counter to stronger climate action.
While high-profile, these examples don’t necessarily reflect the everyday reality of responsible investing. In fact, negative screening (where a filter is applied to rule out offending companies or industries) represents US$19.8 trillion assets under management globally while positive screening (an opportunity to rule in desirable, best-in-class assets) accounts for only US$1.8 trillion. Clearly, ‘do no harm’ is still a predominant theme.
Likewise, there remains considerable emphasis on Environmental, Social and Governance (ESG) integration – in essence a risk mitigation tool that works to identify risks and opportunities, rather than necessarily proactively contributing towards environmental or social solutions.
Both are entirely valid. Yet responsible investing can be so much more. A holistic approach – one that goes beyond negative screening and ESG integration to instead encompass positive screening, impact investing, engagement, stewardship and advocacy – gives individuals the opportunity to invest in a way that genuinely reflects their ethics, values and principles. You should ask for nothing less.
Going beyond ESG
When investors look to invest in an ESG exchange traded fund (ETF), they could be forgiven for assuming it includes social housing assets or renewable energy infrastructure.
However, in reality, this largely depends on the parameters of the fund. Many of these ESG funds may have systematically included ESG issues in their investment analysis and decisions to better manage any risks and improve returns. They might also have applied a negative filter, such as screening out tobacco, gambling and the like. But that doesn’t mean their assets will seek to deliberately solve environmental or social issues.
Does it matter? It depends on what you’re hoping to accomplish. While there’s no doubt ESG integration plays a pivotal role in understanding which companies represent best practice, it’s ultimately just one more factor you should consider in a robust due diligence process.
Certainly, JBWere integrates ESG analysis for investible assets, which also helps clients to make more informed investment decisions. Using tools such as the world-leading database Morgan Stanley Capital International (MSCI), we identify ESG risks and opportunities. Yet that may not be enough for everyone.
Making a positive impact
Take Gen X and Y or one of a growing number of Millennial investors. These generations take a far greater interest in responsible investing than any other demographic. And as they take on the mantle of their family’s wealth, and sit on the boards of charities, they are increasingly looking to invest for the dual goal of performance and purpose in a highly considered and holistic way.
No doubt this calls for ESG integration. But it also requires many other responsible investment tools that are forward-thinking in their approach and actively working to open up real-world opportunities in the area of sustainability.
Positive screening is one example. Compared to negative screening, it is much more nuanced in its approach. It involves a detailed assessment of a particular investment, requiring in-depth research into the impact it might have, directly or indirectly, and whether it meets best practice in terms of its ESG performance. Through positive screening, you can intentionally tilt a proportion of your portfolio towards environmental or social solutions.
Impact investing goes further again. It offers an opportunity to invest where the environmental or social impact of the investment can be specifically measured, monitored and reported. It may be that you invest in a renewable energy project, or a company committed to sustainable agriculture. Or your focus might be a micro finance initiative.
True, this remains a new area with fewer opportunities to invest. However, change is on the way. JBWere, for one, has already launched several impact funds across asset classes including equities, fixed income and alternatives, and last year JBWere clients had the opportunity to directly invest in the world’s largest climate transition impact fund.
Advocating for change
Negative screening has been around for centuries as investors looked to avoid, or divest from, industries or companies that didn’t reflect their values. Today, however, there’s a growing trend to instead use one’s ownership to advocate for change from within rather than simply divesting – the idea being that you have much more chance of shifting negative behaviours this way.
It’s something that has been well recognised by the world’s leading pension funds and is the logic underpinning Cannon-Brookes’ approach to AGL. However, it’s not the only way to pursue change. Direct engagement and informal advocacy are also powerful tools, and our clients can play their part here through the companies and funds they choose to invest in.
At the same time, you can exercise your own right to vote through your direct holdings on our platform.
A framework for the future
Of course, none of this is simple. Opportunities aside, investing in line with your principles takes a clarity of purpose and a strong sense of determination.
Certainly, we wrestle with this challenge ourselves. We ask ourselves, what does it take to offer a genuinely meaningful responsible investing offering? What role do we play in terms of advocacy and where is the line between ownership and agency?
It’s part of the reason we created our Responsible Investment Policy, a first of its kind in Australia. It gives us a robust framework that embeds our holistic approach to responsible investing aligned to global best practice. It not only reflects our current approach but our aspirations for the future and means our interested clients receive the guidance and support they need to pursue their own principles in a truly meaningful way – to invest for purpose as well as performance.
The information contained in this article is gathered from multiple sources believed to be reliable as of the end of October 2022 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. JBWere Limited ABN 68 137 978 360 AFSL 341162 (JBWere) is a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686 (NAB). Before acting on this information, NAB and JBWere recommend that you consider whether it is appropriate for your circumstances. NAB and JBWere recommend that you seek independent legal, financial and taxation advice before acting on any information in this article.
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