Ethical investing, also known as Socially Responsible Investing, corresponds to a type of investment strategy which balances both financial return and social/environmental good to bring about a positive change.
Socially responsible investing (SRI) is said to have been originated by the Quakers spiritual group in 1758, when the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade going on in America at the time. Spiritual and religious institutions have since then been the pioneer proponents of social investing.
John Wesley one of the founders of Methodism, made a sermon entitled “The Use of Money” (1770) where in a certain way he pointed out the key elements of social investing i.e. not to harm your neighbour through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers.
The modern history of Ethical Investment started in the 1980’s. From then and into the early ‘90s a handful of ethical funds emerged, forming what essentially was a cottage industry. One of them, the North Coast Ethical Credit Union Limited, was started in the Northern Rivers in 1990. Headquartered in the Lismore LGA, it was absorbed into Summerland Credit Union three years later. The latter entity has flourished and is an extensive supporter of local community endeavours.
One of the earliest funds emerged from the Earthbank Society which itself grew out of Permaculture. Almost all have since disappeared, except Australian Ethical. At that time the terminology chosen was Ethical Investment; this was more in keeping with UK nomenclature in contrast to America where Socially Responsible Investment (SRI) was typical.
By the early 2000s big conventional fund managers and financial institutions like BT, Colonial, Westpac and AMP showed interest in the sector. More marketing spin than anything, new products were often labeled Socially Responsible, Sustainable, Green, Eco or Environmental.
The ways monies can be invested to achieve what the consumer wants from an ethical or sustainable point of view can be done 5 ways as detailed below:-
● Negative screening – Avoiding companies and industry sectors that cause unnecessary harm to people, planet and animals (e.g. gambling, weapons, fossil fuels)
● Positive screening – Seeking out companies and sectors that are progressing society (e.g. education, technology, healthcare)
● Sustainability themed investing – Focusing on assets that enable sustainable solutions (e.g. clean energy, forestry, sustainable water supply)
● Impact or Community investing – Providing finance to businesses with a clear social purpose, or providing capital to supply goods and services to underserved communities
● Corporate engagement – Influencing corporate behaviour through direct engagement with senior management and/or boards
According to the Responsible Investment Association of Australia (RIAA) their members which include all the major Ethical Investment companies and funds (incl Superannuation), hold over $9 trillion in assets. According to their data the returns for Ethical Investment are generally higher than the mainstream market. So perhaps one can have one’s cake and eat it too (RSPCA approved!)
UN Principles for Responsible Investment
The principles for responsible investment (PRI) were launched in 2006 after an initiative by Koffi Annan.
The 6 PRI are the following:
1. We will incorporate environmental, social and corporate governance (ESG) issues into investment analysis and decision-making processes. Signatories can follow the first principle by supporting the development of ESG-related tools, metrics and analyses and by encouraging research and analysis by service providers and academics on ESG-related issues.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices. Signatories can follow the second principle by promoting and protecting shareholder rights and by engaging with companies on ESG issues.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. Organizations can ask companies to integrate ESG components into their annual financial reports and request standardized reporting of ESG issues through tools such as the Global Reporting Initiative (GRI). The GRI is a sustainability reporting effort that asks organizations to disclose their impact on issues such as climate change, human rights, and corruption.
4. We will promote acceptance and implementation of the principles within the investment industry. Signatories can communicate their ESG expectations to service providers and revisit relationships with providers that do not adhere to ESG guidelines.
5. We will work together to enhance our effectiveness in implementing the principles. Organizations can collaborate to address new issues and support initiatives by sharing information, tools and resources.
6. We will each report on our activities and progress towards implementing the principles. Through this principle, organizations can raise awareness of ESG principles among stakeholders and beneficiaries.