From human rights to recycling bins: how can you define ‘ethical investing’?

Author: Nicole Haddow

Source: The Guardian

Companies are facing increasing consumer and shareholder pressure to ensure the investments they make are ethical. But how do they define what’s ethical?

Broadly, ethical investment is on the rise. According to the Responsible Investment Association Australasia (RIAA), about $1tn of the $2.24tn in managed funds is classified as responsible. That’s not just because Australians are becoming more aware of the impact their investments can have, but also because responsible or ethical investment is really starting to pay. Sustainable, environmentally friendly and socially conscious businesses are often making essential contributions to our future. Through superannuation, banking and shares, people are actively putting their funds into such ventures.

Unfortunately, there’s no uniform indication of what constitutes “ethical”. There’s also no regulation to clarify what ethical investing is as a basic standard. So you need to navigate the marketing.

Ethical screening is generally conducted by fund managers and financial advisers. So, for example, in the case of an ethical superannuation fund, the fund’s managers will establish their ethical expectations and screen prospective companies based on this. Similarly, an ethical financial adviser will have a broad view of what they deem ethical, while also taking their clients’ specific needs into account. If you are investing independently, it will be up to you to decide what’s non-negotiable and what’s acceptable.

To give you an idea of how the big superannuation funds and ethical investment firms decide what’s ethical and what’s not, here’s a list of the ways their investments might be screened.

It’s still not foolproof, but it’s a start.

Negative screening

The negative screening process involves putting companies through assessments to find out if they’re invested in things that people broadly deem unethical. If they produce an addictive product or service (tobacco, gambling), they’re unlikely to get over the ethical hurdle. Likewise, if they engage in poor labour practices, they can be struck off the list of potential investment.

Negative screening is a good place to start when deciding what you will and won’t invest in. If you are staunchly opposed to tobacco, obviously you won’t want your investment portfolio to include a company that makes cigarettes.

Positive or ‘best-in-class’ screening

This involves seeking out companies that have good social and ethical values, such as a zero-carbon-emissions policy, a gender-diverse board and exemplary treatment of staff in the production of goods and services. In essence, they turn a profit by doing the right thing.

Ideally, they do everything right, but depending on who’s screening, they might only need to meet one or a handful of items in the criteria to make the cut.

Companies that perform well in a positive screening process often make a tangible difference to environmental or social outcomes. And, in a perfect world, they’re a good investment too. This might include sectors such as healthcare, education and renewable energy.

All super funds, managed funds and exchange-traded fund managers will do a form of screening, but the screens vary and therefore you may also need to apply your own ethical lens to see if it’s a good fit.

Minimum standards or ‘norms-based’ screening

This approach uses the minimum standard of company, government or international standards. The minimum standards depend on which filter they’re put through. So, for example, they may be subject to assessment based on the Ten Principles of the UN Global Compact. These principles are based, in part, on the Universal Declaration of Human Rights.

The principles cover topics such as:

• Human rights (non-compliance in human rights abuses)

• Labour (recognition of the right to collective bargaining and elimination of compulsory labour and child labour; elimination of discrimination)

• The environment (precautionary approaches to environmental concerns, environmental responsibility and the development of environmentally friendly technologies)

• Anti-corruption

Depending on the fund, or financial product, specific screens will be applied. For example, Verve Superannuation applies a specific gender equality screening. This might be important to you. Alternatively, if you seek vegan and animal-friendly investments, you’d be looking for a specific screen layer. Ethics are personal, and therefore no one broad screen is likely to fit your ethical goals.

Sustainability investing

This is a specific environmental approach, and it means actively seeking out funds or investment opportunities in clean-water programs, renewable energy, infrastructure, recycling, waste management and more.

Environmental, social and governance (ESG) investing

ESG covers environmental, social and governance screening principles. If this is the screen you’re using, you might need to dig a bit to see just how good a company’s governance is. That can mean a fair amount of time and effort on your part: reading company reports, understanding the financial situation and continuing to keep track of the company’s activity once you’ve invested.

Because ESG covers these sweeping, general areas, it makes it possible for businesses to claim they’re meeting the ESG criteria when, in fact, it’s a regular business where people are paid the nominated award wages and there’s a recycling bin next to the printer. Perhaps they report on sustainability during their annual general meeting, but potentially there’s little real change being driven. That’s not to say there aren’t companies with a great commitment to ESG, but you need to be comfortable with where they sit on what is a massive spectrum.

Impact investing

If you choose impact investing as a key screen, you’re ultimately looking to see physical results from your investment. That might come in the form of improved transport and infrastructure, schools or hospitals.

Equally, the impact might be improved social outcomes locally or internationally. Either way, you’ll seek to get a return on investment while hopefully being able to see an actual result.

If you’re unsure where to start, an ethical financial adviser could help you establish a strategy. The first step might be to call your superannuation fund and find out where your money is invested. If they can’t tell you, look for funds that can provide more transparency, so you can consider the contents of the portfolios and how they align with your values. 

This article was written by Nicole Haddow from The Guardian and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.