How ‘responsible investing’ can boost portfolios
More investors see the link between a sustainable economy and society, and sustainable returns.
In 2014, "responsible investments" in Australia and New Zealand rose by 13 per cent to $153 billion, according to the Responsible Investment Association Australasia (RIAA).
Large universities, such as Harvard in the US, have announced plans to adopt so-called socially responsible investing, and for several years, activist groups have encouraged not-for-profits to drop investments in fossil fuels.
As socially responsible investing continues to receive attention around the world from large organisations, it is worth asking: what is it and does it have a role in your portfolio?
According to the RIAA, socially responsible investing takes environmental, social, governance and ethical issues into account as part of the investment process of research, analysis, selection and monitoring of investments.
Practically speaking, this could mean:
- Excluding investments in companies involved in controversial industries
- Supporting the most sustainable, environmentally friendly companies
- Focusing on and governance (ESG) exposures in your investment portfolio
- Using ownership (of shares) to engage with companies and encourage business practices that are socially responsible.
All these approaches may be viewed through "values-based versus a value-based" lens, where values-based rationale is driven by investors' unique beliefs (values), and value-based involves prioritising overall investment objectives (such as managing risks and focusing on long-term returns), while integrating socially responsible considerations in the investment process.
Incorporating socially responsible investing in a portfolio
The implementation options available can differ depending on whether the investor views socially responsible investing through a values-based or value-based lens, or a combination of both.
Other factors that influence options include the size and complexity of investments and the priority given to social responsibility issues within the portfolio.
Simon O'Connor, CEO of RIAA, says: "Members of the public globally are recognising that their savings can be put to work to deliver a strong, sustainable economy and society, while securely growing their retirement nest-eggs, and are increasingly asking this of their investment managers. Similarly, not-for-profit organisations are looking to invest their portfolios to take ESG issues into account."
O'Connor adds: "Practical investment solutions, such as Exchange Traded Funds focused on ESG issues, have made responsible investment more accessible for Australian investors. We anticipate this trend will strengthen as a key driver of continued growth in responsible investment markets, ever more firmly establishing responsible investment as the benchmark of good investment practice."
Below are three practical ways investors are incorporating socially responsible investing into their portfolios.
- Investors can choose products that incorporate socially responsible factors into investment research and decision-making. With these kinds of products, investors can put risk management and long-term value creation at the forefront (the value-based approach). Fund managers create these products by making appropriate modifications to their underlying research processes and/or by using additional tools to analyse portfolio exposures to socially responsible investing opportunities and risks.
- If active ownership is your preferred route, establishing a proxy voting process with your investment provider (letting them vote on your behalf) can allow you to express your views on companies' approaches to socially responsible practices. In addition, collective shareholder engagement - connecting with shareholders of similar views to engage with companies together - can go a step further in lobbying for changes.
- Values-based screening: removing or focusing on investments based on socially responsible factors. This approach can be used successfully by larger investors, which allows them to remove or enhance the desired exposures in their investment portfolio through a variety of approaches, such as a separate account, passive exposures and other instruments designed to mitigate exposures; for example, removing investments in tobacco or adding exposure to solar energy companies.
However, smaller investors and individuals can also access socially responsible investment options.
In April 2015, for example, Russell Investments launched an Australian shares exchange-traded fund (ETF) for investors looking for low-cost exposure to a responsible investment product that incorporates both approaches to screening - removing and enhancing investments to specific companies, based on widely recognised responsible investment criteria and taking into account ESG factors.
These are just a few potential approaches to socially responsible investing. Regardless of the approach, it is important that investors are cautious and diligent about the quality of the investment process and carefully evaluate the likely impact of any unintended risks that may be introduced into the portfolio.
As the field of socially responsible investing evolves, investment solutions and best practices will also evolve. By asking the right questions and assessing risks and opportunities, you can choose an approach that suits your needs.
Russell Australian Responsible Investment ETF
Russell's new ETF is designed to offer the following potential benefits to investors:
- Exposure to a portfolio that focuses on Australian companies with positive ESG characteristics
- Improvement in expected future income, including franking credits
- Flexibility to buy and sell investments on ASX
- Full daily transparency of underlying holdings, and
- Enables effective cash flow and liquidity management in responsible investment-focused institutional portfolios.
|Underlying assets||Australian shares with favourable environmental, social and governance characteristics|
|Number of holdings||Up to 100|
|Launch date||April 2015|
About the author
Nicki Ashton is Head of Strategic Partnerships at Russell Investments.
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