There is a worldwide trend for investors to want to make a positive contribution to the world by investing in companies that are socially and environmentally responsible. If you are passionate about the effects of climate change, the scarcity of food and water, and social or environmental policies in general, then you will no doubt wish to ensure that the companies in which you invest are going about their business in a manner that is consistent with your views.

Traditionally, fund managers have had full discretion to invested funds based on expected financial return, however investors are now demanding more information about where their money goes and whether they are unwittingly supporting the expansion of companies that are harming society or the environment. Responsible investing describes an investment strategy which seeks to maximize both financial return and social good.

In the early days of responsible investing, funds typically used what is referred to as a ‘negative screen’ for selecting investments, which means they avoid investments in such things as tobacco, alcohol, gambling and armaments. Later came funds using a ‘positive screen’ which means they sought out investments in companies whose products are good for society or the environment, such as companies involved in clean technology (eg wind farms or water purification).

More recently, fund managers are using a range of environmental, social and governance (ESG) criteria to assess companies. As responsible investing grows in momentum, fund managers are using the voting power they have as shareholders to directly influence the ESG policies of companies an approach sometimes referred to as ‘shareholder activism’.

The evidence clearly shows that companies with sound ESG policies also produce excellent financial returns, so that responsible investors can indeed be rewarded for their contribution. For more information, contact your adviser or the Responsible Investment Association of Australasia www.responsibleinvestment.org