Urgent Need to Simplify Ethical Investing

Social impact investing is already a $23 trillion global industry, but more still needs to be done to make it easier for people to ethically invest in the future, writes Community Sector Banking CEO Andrew Cairns.    

Nine out of 10 Australian investors expect their funds to be invested responsibly and ethically.

However, navigating socially responsible investing remains far too complex and confusing. A lack of agreed definitions and standardised products is blocking sustainable investment from becoming mainstream. Investors want to see how “green” (or socially responsible) their investments are and gauge the size of the social and environmental outcomes they’re having.

The market for Australian impact investments has grown significantly, swelling in less than three years from $1.2 billion at 30 June 2015 to $5.8 billion at 31 December 2017, according to the Responsible Investment Association of Australasia’s 2018 benchmark report.

Yet ethical investing still comprises less than 10 per cent of total global wealth, which reached $280 trillion last year. More needs to be done to make it easier for people to make ethical investment choices.

A major challenge is that options for ethical investment vary wildly and fall along a difficult-to-navigate spectrum of “light green” to “deep green”, depending on the screens applied by investment managers.  

Some funds merely factor in the risk of a company’s environmental, social and governance (ESG) issues. They don’t shy away from particular companies or sectors as long as a target company’s share price factors in any risk from negative issues.

About midway on the spectrum are funds that tilt away from – but don’t necessarily avoid – sectors considered harmful, such as tobacco, gambling and weapons.

And at the “deep green” end, responsible investment funds fully consider an array of environmental, social and governance issues. Some will take a double bottom line approach, first screening for financial performance and then screening for impact.

“Deep green” funds will analyse negative and positive impacts of potential investment targets and may also engage with a company’s board to drive improvements in environmental, social and governance performance.

There is definitely a demand for social impact investing. Social impact investing is already a $23 trillion global industry that grew 25 per cent in the two years to 2016. It is part of a broader rise in people looking to make more ethical purchases – whether that is seeking out fair trade clothing, coffee or even where to have brunch.

Meanwhile, customers already have an opportunity to vote with their feet when it comes to supporting businesses and organisations that are operating with a community-strengthening mindset.

Movements such as B Corp have certainly made it simpler for consumers to ascertain which businesses are committed to doing good. They also actively improve businesses – by being part of measurement and assessment programs, businesses are guided through how best to make a more positive social impact and pushed to improve.

The ethical investment community could learn much from this movement, which provides easy to understand, and universal measures for assessing whether a business is operating ethically. Then, we might see greater investment in businesses that strengthen our communities.

Tips for a more positive social impact

• Question the impact of your spending and consider how you can make a more positive impact through your everyday consumption.
• Seek out B Corps, Supply Nation accredited companies (owned by Aboriginal or Torres Strait Islander people), carbon neutral companies, companies with policies around tobacco, fossil fuels and gambling, Fair Trade accredited business, co-ops, community-owned organisations and companies with a strong track record of giving back.
• To be certain the broader societal impact of your investment has been taken into account, seek out “core responsible investment” strategies where exposure to investments that do harm is eliminated or minimised, and where the portfolio is focussed on positive, future-building investments such as renewables, healthcare, biotech and enabling technology.