How to become an SRI investor

Negative screening of undesirable companies or sectors

Negatively screened funds will exclude companies from certain sectors, for example tobacco, armaments, alcohol, uranium and gambling or those involved in animal testing.

These funds are most often called ethical investment funds and cater to the individual investor as well as religious and charitable investors seeking to align their values with their investment decisions.

Research all companies for their environmental, social and governance performance

These funds will conduct extensive research into a vast number of environmental, social, ethical and governance issues affecting all of the companies eligible for the portfolio. Research techniques may include:

n incidents reported in the media;

n research reports provided by stockbrokers;

n specialist, issues-based research on corporate conduct provided by non-governmental organisations;

n one-on-one interviews with the target companies;

n questionnaires filled out by the companies;

n analysis of the company sustainability reports;

n rating companies against international benchmarks such as the United Nations Declaration on Human Rights.

Positive investment in sustainable industries

These funds will actively seek out companies whose products and services have a positive affect on society and the environment.

This may include water and waste management, renewable energy and energy efficiency, sustainable agriculture, mass transport, sustainable property, education, aged care and healthcare.

Investing in the most sustainable companies in all sectors (best of sector)

Ethical investing is the incorporation of ethics into the investment process, while best of sector investing is based on the concept of ‘sustainable development’.

The implication is that all industries, including industries like tobacco and mining, should adopt the highest standards of environmental, social and governance practice in order to meet the expectations of society, and also to achieve sustainable and profitable business goals.

Sustainability investing chooses the leaders in each sector based on their progress in taking their industry toward a sustainable future.

The approach is based on the premise that companies with strong sustainability credentials are generally better managed companies, and therefore better investments.

Engages with companies on environmental, social and governance issues

These funds will contact the companies they invest in if their research indicates they have serious, ongoing failures regarding environmental, social or governance issues.

Sometimes they will collaborate on common issues with other funds from Australia or across the world, which can increase the likelihood of a positive outcome from the engagement process.

For example, several large superannuation funds across the world have targeted US car manufacturers that are purchasing their steel from Brazilian mining companies known to be using bonded labour.

Raises resolutions and votes on environmental, and social issues

Voting rights are a powerful mechanism to achieve improved corporate social responsibility.

While it will always be difficult to achieve a majority vote for resolutions based on environmental or social issues, a positive vote of about 20 per cent or more is often enough to capture the attention of a corporate board and to affect change.

For example, it was an environmental resolution raised by a group of nuns and gaining support of 24 per cent that inspired GE to undertake its huge environmental initiative called EcoImagination.

Funds that are active owners will exercise their right to vote and their right to raise resolutions in order to achieve better management outcomes from the companies they invest in.

In the United States resolutions concerning environmental and social issues are increasing every year, and that trend is moving across the world.

Definitions written by Louise O'Halloran, executive director of the Ethical Investment Association.