ESG stands for Environmental, Social and Governance; it refers to three main factors that investors consider with regard to an organisation’s ethical impact and sustainable practices. Socially conscious investors such as Not-For-Profits use ESG criteria to screen potential investments and assess whether they fit their values, mission or sustainability mandate.
According to the Responsible Investment Association Australasia (RIAA), 9 in 10 Australians expect their investments to be responsibly and ethically invested. This means investing funds in a way that does no harm, and ideally leaves the world in a better place.
Of particular interest to NFPs is the use of negative screening (also known as values-based or ethical screening). Negative screening is used to exclude companies from an investment portfolio on the basis of the industry in which they operate. This could involve screening for religious, ethical, moral and other social and environmental criteria (e.g. tobacco, gambling, weapons, animal testing). The other side is positive screening, where NFPs utilise ESG research to identify companies with superior ESG performance relative to industry peers.
In addition, incorporating ESG factors into an investment decision may even result in an outperformance effect.
It is important to be aware that particularly in the Australian context, there is a risk that imposing a large number of negative screens on a portfolio, can reduce the ability to diversify your portfolio. It may also deliver performance outcomes that differ from traditional market benchmarks.
Morgans has a specialist Not-For-Profit team that can assist you with all your ESG and negative screening questions. Get in touch with your Morgans adviser to find out more.
Examples of ESG issues
Environmental
- Climate change
- Waste and pollution
- Clean water and sanitation
- Affordable and clean energy
Social
- Supporting local communities
- Human rights
- Employee relations and diversity
- Quality Education
Governance
- Bribery and corruption
- Board diversity and structure
- Executive compensation
- Data security and customer privacy
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