Recent climate change publicity provides the ideal introduction to a discussion about the worldwide increase in socially responsible investing (SRI). This growing trend especially appeals to millennials, who want their money to be invested in companies with a strong ethical focus.
The philosophy behind Sustainable Investing is that both supply and demand sides of the market share this responsibility. With the understanding that companies operate to meet demand, and all else being equal, a sustainability strategy should reward companies for acting more responsibly than their industry counterparts. Companies will benefit from creating a society that is both positive and sustainable, while delivering a sound financial return.
The most common approach is for SRI funds to utilise a ‘negative screening’ process. This seeks to exclude certain companies or industries assessed as having a negative impact on society, such as industries associated with armaments and tobacco.
Some SRI funds also include a focus on shareholder advocacy, with the investment manager taking a proactive role ensuring a company acts responsibly on a range of environment, social or governance issues. SRI funds can also consider other criteria such as the level of community investment and assess companies on what financial and other support that they provide different segments of the community.
Investment managers may assess companies on some, or all, of these criteria, and then rank them. The screening process identifies which companies to avoid.
Socially responsible managed funds are now widely available including KiwiSaver funds. As access to these investments increases it pays to remember that other key investment criteria also apply, such as fees and diversification.