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Technology and the rise of social media are fundamentally changing how we choose to invest. In decades past, most investors were content to base their investment decision on a company\u2019s financial fundamentals \u2013 what it did, how much it made, the calibre of its leaders \u2013 but now the wealth of information at our fingertips means we can\u2019t avoid considering the full extent of a company\u2019s operations. That includes its employment practices, and its community and environmental impact, throughout the supply chain.<\/p>\n
\u201cIn the past you didn\u2019t know what was in a company\u2019s supply chain,\u201d says Shamal Dass, Head of Philanthropic Services a JBWere. \u201cYou didn\u2019t know who they were employing in other countries or what the conditions of work were there.\u201d<\/p>\n
It was the same for environmental impact. Now people know \u2013 and, moreover, they want to know. As the United States\u2019 SIF Foundation notes, climate change is a major source of concern today, but there\u2019s also growing concern about the breadth and depth of social problems despite unprecedented levels of wealth.<\/p>\n
It\u2019s hardly surprising then that a growing body of people prefer to invest their money in a way that more closely aligns with their personal values.<\/p>\n
This is reflected in the changing approach to professionally invested funds. There\u2019s a commitment by many investment managers, superannuation funds and financial advisers to invest in a socially responsible manner, be it through integration of environmental, social and governance factors into their portfolios or excluding entire industries on the basis of values.<\/p>\n
According to the Global Sustainable Investment Alliance, there are now $US22.89 trillion of assets being professionally managed under responsible investment strategies around the world,\u2028an increase of 25 per cent since 2014. Meanwhile, Australia\u2019s responsible investment market grew from $US148 billion in 2014 to $US516 billion in 2016 \u2013 a 249 per cent increase \u2013 and now accounts for more than half of all professionally managed assets.<\/p>\n
Understandably, not all \u2018socially responsible investment\u2019 looks the same. While some people are content to exclude certain companies or sectors from their investments, there are those who want to change the world by making a targeted investment in a cause of their choice, whether through a fund, corporation or organisation.<\/p>\n
JBWere identifies three core pillars in socially responsible investing. They are:<\/p>\n
Integration of environmental, social and \u2028governance (ESG) factors \u2028<\/p>\n<\/li>\n
Screening based on ethical, moral or \u2028religious beliefs (ethical investing) \u2028<\/p>\n<\/li>\n
Impact investing\u00a0 \u00a0 \u00a0\u00a0 \u00a0\u00a0<\/strong><\/p>\n<\/li>\n<\/ol>\n JBWere considers ESG essential \u2013 not only for the purpose of socially responsible investments but for investing in general. While it seems to have that feel-good factor, Dass explains, really it\u2019s about best practice. By considering a company\u2019s environmental and social record, as well as how it\u2019s governed, an investor ensures they have the additional data required to determine whether it\u2019s being run well.<\/p>\n \u201cPeople are realising that it\u2019s got nothing to do with how you feel about what a company does. It\u2019s how well they\u2019re run and how well they\u2019ve built their business to be sustainable into the future.\u201d<\/p>\n In fact, ESG isn\u2019t optional for JBWere clients. \u201cThere\u2019s no opt out because if you fundamentally believe all the research, you can\u2019t opt out,\u201d Dass says. \u201cYou can\u2019t say, \u2018Hey, let\u2019s not manage your portfolio in line with best practice because you\u2019ve chosen not to\u2019. Our job as advisers is to educate;\u2028to say this is best practice so we\u2019re doing it.\u201d<\/p>\n Ethical investing, on the other hand, is where you eliminate certain investments from your portfolio because of ethical, moral or religious beliefs. Whether or not a company has a high ESG rating has no bearing here.<\/p>\n \u201cIt\u2019s much more of a personal choice,\u201d Dass says. \u201cYou need to consider what your values align with.\u201d<\/p>\n While it may seem relatively simple to rule out certain companies or industries, there are challenges. For instance, if you\u2019re investing indirectly through a managed fund, it may be difficult to find what you\u2019re after. You may wish to rule out tobacco or alcohol but have no problem with gambling. Finding that product can be tricky.<\/p>\n There\u2019s also the fact that opting out of\u2028a whole swag of industries might seriously deplete your pool of potential investments, particularly in a small market like Australia. \u201cEthical investing can potentially reduce financial performance because it\u2019s necessarily limiting the universe you\u2019re investing in,\u201d Dass notes.<\/p>\n However, he shrugs this off. \u201cIf it\u2019s values-based then that shouldn\u2019t really matter to you because not being in tobacco matters more to you than the one per cent return you gave up.\u201d<\/p>\n \u00a0Impact investing is different again. Its aim is to address the world\u2019s most pressing challenges by investing in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare and education.<\/p>\n \u201cImpact investing takes a completely different lens,\u201d Dass explains. \u201cIt\u2019s not just one or two products that you tack onto your traditional investments. It\u2019s a whole different way of thinking \u2013 of investing.\u201d<\/p>\n Ultimately it aims to overcome the tension between making a lot of money and doing good. \u201cWhy can\u2019t your investment be about making six or seven per cent return while you build a water facility in a poorer country that will improve nutrition and save lives?\u201d Dass asks. \u201cYou don\u2019t have to make money over here and give out money over there as a philanthropist. You can actually do the whole thing together.\u201d<\/p>\n The difficulty with impact investing, however, is a lack of supply and demand. \u201cImpact investment is still developing, and we\u2019re all trying to evolve quickly and not only understand the deals but convey it to investors\u201d Dass says.<\/p>\n For now, it\u2019s effectively out of reach of the average mum-and-dad investor, he adds, and there are barriers to entry for the institutional investor as well. \u201cScale is the issue at the moment \u2013 to build the deals in which the big funds can participate,\u201d Dass says.<\/p>\n Nonetheless, he remains very upbeat about its future prospects. \u201cThe potential is still there. It\u2019s just people need to become a bit more broad in their understanding of what it is.\u201d<\/p>\n While JBWere is taking the lead in Australia, Dass argues that all wealth managers have an important role to play here.<\/p>\n \u201cWe don\u2019t want this to be our key differentiator forever and a day. We expect that the other larger wealth houses will [step up] and it\u2019s completely necessary. That\u2019s how it becomes the norm \u2013 because everyone does it.\u201d<\/p>\n In the meantime, all investors can\u2028benefit from the fact that there are more opportunities than ever to invest in the responsible investment market. Thanks to technology, even the smallest investor can\u2028do their own homework to decide which company stocks they wish to avoid and which stocks might just help save the world.<\/p>\n\u00a0 \u00a0 \u00a0 1. ESG: The non-negotiable\u2028<\/h3>\n
\u00a0 \u00a0 \u00a0 2 .Ethical investing: taking a stance\u2028<\/span><\/h3>\n
\u00a0 3.\u00a0Impact investing: looking to the future<\/span><\/h3>\n
A sense of purpose<\/h3>\n