A guide to socially responsible investing

20 December 2019

Saving for the long term – whether for retirement, your first house, your kids’ education or perhaps that dream boat – is a process that takes some degree of patience. A lot of your time and effort is spent earning those savings.

There are several tantalising options out there and it can be disappointing if your funds end up invested in a company which does not match your personal values.

The key question to ask yourself is: are your savings invested responsibly?

Approach to responsible investing

There are several approaches that a fund management company can take towards investing responsibly. But unfortunately, these can be inconsistent across providers and are not always transparent. Fortunately, there are certain best practices to look out for.

ESG investing

ESG investing considers the environmental, social and governance aspects of a company as part of the investment due diligence process.

Companies today release more non-financial information than ever before. Investors can access a wealth of information detailing a company’s environmental data on its carbon emissions and water use; social data on employee wellbeing and human rights; and governance data detailing the skill and experience of company directors. All this information can be used in combination with traditional financial analysis to make considered investment decisions. 

With this framework, it becomes easy to identify companies that you definitely should not own, companies who you perhaps might want to own less of, and companies who should be engaged with to convince them to change.

Socially responsible investing

Consumer choice is also important. Sometimes your own personal values and social responsibility sensibilities can lead to very specific requirements.

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Suppose you would like to have your say on climate change by not investing in any fossil fuel companies? Or your personal beliefs dictate that you should not invest in gambling or tobacco stocks? Perhaps you’d prefer to crack down on the use of genetically modified organisms?

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Such requirements demand a more structured approach to selecting suitable investments. This is where Socially Responsible Investment (SRI) funds kick in.

Not only do they factor in ESG data, but they also avoid investing in sin sectors like fossil fuels, GMOs, gambling and tobacco.

By screening out companies whose products or services are not a good match for your personal values, you can send that industry a clear message that they need to change. 

Socially responsible investing in practice

When the global movement to divest from fossil fuels took off on U.S. university campuses in 2010, it was not taken seriously. Today, it's a very different story. There are over 1000 different institutions and $11 trillion in funds that have refused to invest in fossil fuels. This movement has made oil and gas companies realise that the world is changing and there is demand for a transition.

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A bit closer to home, New Zealand is one of the few countries to frown upon investing in controversial weapons. In 2019, New Zealand banned the sale of military-style semiautomatic weapons after the Christchurch mosque tragedy.

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Some investment companies have taken the spirit of this exclusion further, by removing or avoiding investments in industry related companies. As an example, Booster’s socially responsible investment funds avoid investing in controversial, military and civilian weapon manufacture and/or production.

Riaa IconResponsible investment fund certification

There is a fine balance between profit, risk and responsibility and a fund manager must have the capabilities to navigate this path with care. The Responsible Investment Association of Australasia (RIAA) certifies funds in New Zealand that follow certain responsible investment principles. If you’re not sure about an investment fund’s credentials, look for the RIAA certification mark as a good way to identify an SRI fund.

Mindful money is another way to find suitable funds that match your personal values and investment interests.

Read: Responsible investing toolkit >

Ian Author

By Ian de Souza, CFA

Ian is a global equity analyst on our research team. He has a keen interest in economics, investing and ecosystems. One can usually find him wrestling with an excel spreadsheet, immersed in the Financial Times or digging up eclectic charts and figures on social media, reddit and twitter.