Step 2: Considering Your Ethical Values
Three key Responsible Investment questions that Rodger will explore with you are:
1. What are the important issues for you when considering investment?
2. Are there companies or industries you wish to avoid or invest in?
3. Do you want to foster engagement with companies by investing in them and communicating your environmental and social concerns to companies to encourage their continuous improvement?
To provide more understanding of the approaches, it is useful to classify investors according to four types: traditional, avoidance, activist and alternative. These are discussed below. In practice an investor may be a combination of these types: for example having a portfolio that avoids investing in certain areas, invests in companies and actively encourages them to continuously improve and also allocates money for alternative investments.
A traditional investor makes choices of what to invest in based solely on their perception of risk and reward and the financial bottom line. The traditional investor does not invest with an eye towards making a difference from an environmental or social perspective. That is not to say, however, that they might not be environmentally or socially responsible in their personal lives, such as contributing some of their time and money to good causes.
An avoidance investor wants to avoid particular areas such as tobacco and gambling. They are like the religious groups for whom the term ‘sin stocks’ was coined to explain how they wanted to avoid investing in areas that were contrary to their religious principles and teachings. Nelson Mandela advocated this approach in the 1970s when he called for investors to avoid investing in companies doing business with the apartheid regime. Mandela saw the resulting divestment as instrumental in overcoming apartheid. This was a powerful example of making a difference.
An activist investor wants to engage with companies to encourage them to continuously improve their environmental, social, and economic performance. This investor does not believe that Responsible Investing is limited to the buy and sell decision-making processes, but that it entails dialogue between shareholders and management on a continuing basis. In the US considerable emphasis is placed on the benefits to be gained through the shareholder resolution and proxy processes. This is also the focus for a group of the world’s largest institutional investors, including the NZ Superannuation Fund, who are signatories to the UN Principles for Responsible Investment. They have all committed to being active owners, who will exercise their voting rights and engage with companies around environmental, social, and corporate governance issues. Another significant local signatory is the ASB Community Trust.
An alternative investor wants to invest in alternative initiatives that have a high environmental and social contribution. Alternative investors are willing to sometimes accept somewhat lower financial returns or greater risks in order to generate what they consider higher total returns, by investing in local sustainability initiatives where funding is made available at lower cost to borrowers in areas such as the environment, education, art, healthcare, and sustainable agriculture.