Values-aligned investing is an investing approach to generate returns to match your beliefs and principles.
While its definition is succinct and singular, what’s perhaps surprising is the number of ways values-aligned investing can be brought to life.
Some people may want to avoid certain companies they believe are harmful to society, such as producers of tobacco or weapons. Others may look to only invest in companies and assets that contribute to positive outcomes for people and the planet. Some may want to invest to make a positive and measurable difference to specific areas such as the provision of low-income housing or renewable energy sources.
As diverse and varied as peoples’ values and principles are, values-aligned investing can be equally diverse. Similarly varied are the extremes and extent of value alignment offered by professional managers.
Now mainstream
Synonymous with responsible and sustainable investing, values-aligned investing has shifted in the last decade from being a relatively small segment of traditional investments to a mainstream approach that touches the majority of professionally managed funds.
Now 93% or $3.31 trillion of all professionally managed funds in Australia have some kind of a public commitment to responsible investing, the latest Responsible Investment Association Australasia’s 2023 Benchmark Report highlights. A much smaller amount (36%) of funds managed meet Responsible Investment Association Australasia’s (RIAA) standard for having a measurable commitment to investing responsibly.
The rise of values alignment in investing has been fueled by the increasing awareness of now daily talked about topics, including climate change and temperature reduction targets, inclusiveness in societies and workplaces, exploitation of vulnerable people and protection of animals and ecosystems.
As peoples’ awareness of these issues continues to grow, so do the number of professional fund managers factoring Environmental, Social and Governance (ESG) into their investing considerations.
While funds are increasingly being asked to prove their commitment to investing responsibly through ever-increasing measurement and disclosure standards, the approaches they take can be varied and not always clear.
Finding the right alignment
Professionally managed fund options will fall somewhere on a spectrum of responsible investment depending on whether they screen or exclude certain companies and sectors from their portfolios, agitate for change among the companies they invest with, tilt their portfolios towards certain future-focused areas, or provide funding to achieve a social or environmental outcome.
Source: Bridges Fund Management- Bridges Spectrum of Capital Report
At one end of the spectrum is the so-called ‘traditional’ or ‘financial-only’ approach to investing, which provides limited or no regard to environmental, social, governance or ethical factors. This style of investing can encapsulate everything from term deposits to traditional managed funds products without any consideration for values alignment built in.
Responsible investing is just next to traditional investing on the spectrum of values aligned investing and incorporates ESG factors, which can include exclusionary or negative screening. We find that this style of investing is usually an entry point for investors seeking value alignment.
Sustainable investing is again another step up in values alignment, which aims to enhance portfolios by adopting ESG factors. Among sustainable investing approaches is norms-based screening, which is beginning to attract more interest among values-aligned investors and draws on another layer of sophistication building on the entry-level approaches. RIAA measured an 85% increase in norms-based funds under management to $255 billion in 2023 compared to the prior year. Norms-based screening attaches to minimum standards of business practices based on international norms such as the Paris Agreement on Climate change or the UN Declaration of Rights of Indigenous groups.
Tilting portfolios towards solutions or investing in companies and industries with positive ESG attributes compared with benchmarks or peer groups, along with ‘sustainability-themed’ portfolios are examples of values-aligned investing approaches that aim not only to avoid harm and generate returns but also contribute to solutions.
Impact investing is a category of values-aligned investing that sets a higher bar for positive social and environmental changes, requiring measurement and reporting to demonstrate outcomes directly as a result of the investor contributions.
Authenticity and commitment to values-aligned investing continue to be tested by regulators, researchers, standards bodies, and indeed investors, as the appetite for this style of investing grows and more funds enter the category.
Australian Ethical’s differentiated approach
Since 1986, we’ve been harnessing the power of money to create a better world for people, planet and animals. ESG considerations and sustainable investing are embedded into everything we do.
By comparison, ethical investing can be difficult for already established investment firms as they seek to genuinely embed a responsible investing framework into an existing philosophy and process.
Stewardship, or the willingness and ability of investors to hold companies and their leadership teams to account, is another differentiating factor that separates leaders in responsible investment like us from the rest. This is an area of increasing importance for values-aligned investors.
We believe it’s possible to influence progress towards a better future for people, the planet and animals, alongside pursuing financial investment objectives, by allocating more capital to ethical companies restricting capital for unethical ones and using our voice to influence for positive change.
Learn more about Australian Ethical and how we can help you invest ethically and sustainably in a range of investment portfolios.