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Data collected by the Responsible Investment Association of Australia has found ESG integration, referring to when a fund considers the social and environmental impacts of a company (as well as how well it is governed) before investing, is becoming more common, and now accounts for $557 billion in assets.

To explain what this means, Australian Ethical’s Stuart Palmer (the company’s in-house ethics researcher) told a media event in Sydney that ESG integration guides the way a fund invests its capital.

“A fund which does ESG integration might, for example, reduce its valuation on a stock to take into account per cent risks of environmental claims against the company or risk of workforce disruption if there’s a concern the company’s not managing those issues well,” he said.

However, Mr Palmer noted that ESG integration’s role as a responsible investment tool is one which focuses primarily on looking for a better balance between taking on risk and the payout that risk will ultimately offer to an investor.

“The environmental and social impacts are important to the extent they affect the risk/return profile of an investment in a company,” he explained.

“If I’m adopting an ESG integration approach and I’m considering further investment in fossil fuels, then I’m going to think about how likely it is that governments are going to take strong climate policy action; are they going to introduce a price on carbon?

“Then I need to think about given what I expect is going to happen there, what impact will that have on fossil fuel companies and associated projects.”

The UN Principles for Responsible Investment (UNPRI) offers a similar explanation of ESG integration and its role as an investment tool, noting that inclusion of such a strategy “does not require ruling out investment in any sector or company” but rather make a more informed decision based on a broad set of criteria.

“While these approaches seek to combine financial return with a moral or ethical return, responsible investment can and should be pursued even by the investor whose sole purpose is financial return,” the UNPRI said.

“To ignore ESG factors is to ignore risks and opportunities that have a material effect on the returns delivered to clients and beneficiaries.”

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