In 2019, a nationwide survey found that an overwhelming number of Australians (78%) were worried about climate change – a concern which escalated in 2020 as Australia faced one of its worst bushfire seasons ever. This was followed by the outbreak of Coronavirus, which laid bare the effect of insecure work and poor-quality housing on many Australians. So it’s no surprise that more investors are looking critically at how companies are managing their environmental and social responsibilities.
Responsible, ethical or sustainable investing – putting your money into companies or sectors that are aligned with your values – has been around for many years. But it’s only become part of mainstream investing recently, as more of us realise the power that investing has to change society for the better.
To make a difference yourself, you don’t have to directly buy shares in windmills, batteries or social housing. The money you put into your super fund can make a positive impact if your fund invests responsibly – choosing companies with strong social or environmental credentials and avoiding potentially harmful ones.
One of the most common classes of responsible investing is known as environmental, social and governance (ESG) investing. ESG is a valuable tool that combines research, analysis, selection and investment monitoring. It allows super funds to screen an investment not only for its ability to generate financial returns, but also for its impacts on the environment and society.
With ESG investing, super funds measure companies against key environmental principles and decide to avoid or divest from those that score poorly – such as companies that are highly polluting. They may also use ESG to identify companies that are helping decarbonise the economy, like wind or solar farms.
Similarly, super funds may screen a company for its positive social impacts, such as fair labour standards, or those whose practices can harm society – tobacco or weapons manufacturers, for example. Just as importantly, ESG investors analyse a company’s governance, avoiding those with records of corruption or anti-competitive practices, and favouring companies that have transparent processes and diverse boards.
As well as considering a company’s ESG record, super funds may also look closely at any climate-related risks that could affect the company. For instance, a company’s production and operations could be affected by an increase in extreme weather events – which could then reduce its revenue and therefore the value of its shares.
Good outcomes without sacrificing returns
Investing responsibly using ESG isn’t just about doing the right thing – it can also make financial sense. For example, investing in new areas like green hydrogen could help lower carbon emissions. At the same time, because these technologies are poised to grow, such investments could provide attractive returns. Using ESG principles can also help avoid old, increasingly unprofitable technologies as Australia transitions to a low-carbon economy.
Source: Colonial First State