Responsible investment is a process that takes into account environmental, social and governance (ESG) issues into the investment process¹.
The PRI (Principles for Responsible Investment) lists the following factors² behind the growing momentum in responsible investing:
- recognition in the financial community that ESG factors play a material role in determining risk and return;
- understanding that incorporating ESG factors is part of investors’ fiduciary duty to their clients and beneficiaries;
- concern about the impact of short-termism on company performance, investment returns and market behaviour;
- legal requirements protecting the long-term interests of beneficiaries and the wider financial system;
- pressure from competitors seeking to differentiate themselves by offering responsible investment services as a competitive advantage;
- beneficiaries becoming increasingly active and demanding transparency about where and how their money is being invested;
- value-destroying reputational risk from issues such as climate change, pollution, working conditions, employee diversity, corruption and aggressive tax strategies in a world of globalisation and social media.
As Kylie Charlton said recently on the How I Did It podcast, if you have two investments with identical potential return but one has a positive social or environmental impact as well – why wouldn’t you choose the investment with positive impact.
Investors are voting with their dollars if the growth in responsible investment in Australia is any indication. According to the latest RIAA Benchmark report, responsible investment assets in Australia increased by 39% in 2017. The report also busts the myth that investing responsibly leads to inferior returns. In fact, research is increasingly showing that taking environmental;, social and governance factors into account improves investor returns.