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Investments aligned with principles

responsible investing

Environmental, social and governance-based investing can combine return objectives with principles in which individuals place great importance.

Responsible investing is becoming increasingly mainstream as individuals gain awareness of the power they have, through their money, to effect positive change in the world.

A study commissioned in 2020 by Responsible Investment Association Australasia found 86 per cent of Australians expect their superannuation to be invested responsibly and ethically. This represented a significant shift in sentiment from 2013, when a similar study found only 69 per cent of superannuants thought this was an important investment consideration.

Ethical Investment Advisers partner Karen McLeod confirms she has seen a notable rise in demand for responsible investment.

“Clients are saying: ‘I would like to know that my money is doing more good than harm. I would like to know that I’m contributing in a good way for future generations,’” McLeod says.

“They understand that their money is a powerful way to provide solutions to some of the issues that we are facing.”

SMSFs have more flexibility than other retirement savings vehicles to invest in assets that will make a difference and a wide range of options are available to them. These range from managed funds that apply simple screens to exclude or include certain sectors or companies, to investments in individual assets or projects that directly address a particular social, ethical or environmental issue.

Screening processes

Early iterations of responsible investment products sought to exclude companies operating in so-called sin sectors – pornography, alcohol, tobacco – from investment portfolios, using negative screens.

McLeod says responsible investment has become much more sophisticated at addressing environmental, social and corporate governance (ESG) issues over the past 20 years.

Negative-screen investments have broadened their scope to exclude companies whose activities involve extracting and refining fossil fuels to financing those activities and more.

Some funds apply positive screens, actively including renewable energy or healthcare companies, for example, or include a combination of positive and negative screens in their asset selection processes.

Other funds take a best-of-sector approach. “They might say: ‘Of all of the gold miners, this one has the best employment relations, environmental and community relations,’ and include it,” McLeod explains.

Finding solutions

Another approach to responsible investing aims to actively contribute to solving the world’s problems.

The United Nations has developed a set of principles of responsible investment that some investment managers are using as a guide to incorporating ESG issues into their investment decisions and processes. For example, Laureola Advisors, as a signatory to the voluntary UN Principles for Responsible Investment,  says its life settlements fund is addressing social issues in the United States at the same time as generating returns for investors.

The fund buys life insurance policies from senior citizens in the US, relieving the cohort of the financial burden of insurance premiums and providing a payout they can use to maintain their standard of living and access long-term nursing and aged care. Investors in the fund receive a return when the insurance policies reach maturity.

The manager believes the fund is alleviating a shortfall in retirement savings among US seniors and helping those people to live in dignity, while also lightening the load on family members and government programs. The fund’s investment process ensures the senior policyholder fully understands the implications of their decision to sell their insurance and their beneficiaries are involved and must consent.

Investors who want to focus even more strongly on the issues they care about may be attracted to impact investment, where the primary aim is to deliver measurable social, environmental or cultural impacts, with investment returns expected to follow.

“That’s where there’s something new being delivered, whether it’s new social housing, renewable energy or similar,” McLeod points out.

Look beyond the labels

The variety of responsible investments available means SMSFs need to carefully examine each option, McLeod warns.

“Look beyond the labels to the underlying holdings. Look for a full list of the entire portfolio, not just the top 10 holdings,” she advises.

SMSFs can only make informed decisions about whether an investment aligns to their own values and goals if they fully understand what the investment is achieving.

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