What is responsible investing?
At Colonial First State, we define responsible investment as a strategy and practice that incorporates a range of environmental, social, governance and climate-related factors in the investment decision making process.
ESG and climate explained
Due to the diversity of beliefs and values our members hold, we aim to offer choice when considering environmental, social and governance considerations into the investment process.
Environment
The value, growth and sustainability of an investment may be impacted by environmental changes and risks. These risks may be real or perceived, or the business of the company may impact the environment and incur financial and reputational penalties.
Land use – logging and land clearing, causing loss and destruction of soil vegetation and habitat. This leads to possible extinction of wildlife.
Waste and pollution – improper disposal of waste, chemical leaks and spills. This leads to reduced air quality and the contamination of water and land.
Resource depletion – intensive agriculture could cause changes to local water supplies and be significant enough to require additional water infrastructure.
Climate change – fossil fuel extraction and use, creating greenhouse gas emissions and contributing to global warming.
Social
The value, growth and sustainability of an investment may be impacted by social risks, where the investment may be impacted by social, labour and human rights risks.
Health and safety – unsafe or unhealthy working conditions for workers.
Community – the treatment of indigenous communities, including re-settlement and land acquisition.
Human Rights – encompassing issues such as bonded labour, modern slavery and child labour.
Labour standards – ranging from being paid unfair wages and having to work unfair hours, to not having access to labour unions or methods of labour protection.
Governance
The value, growth and sustainability of an investment may be impacted by governance risks where the investment may be impacted by good or poor governance.
Transparency and accountability – poor internal activities that may result in lack of transparency and lead to poor decision-making.
Fraud and corruption – inappropriate risk-taking or weak policies and risk management that can result in fraud.
Board diversity and independence – diversity of gender, independence, background, skills, experience and personal attributes could provide a quality board that is free from undue influence.
Voting procedures – allowing shareholders to exercise their rights through ownership practices such as engagement and raising shareholder resolutions, a company will bring to light unaccounted for or neglected risks.
Climate
Climate change poses significant risks to our environment, economy and society.
Physical risks from the direct impact of climate change on our physical environment – through loss of resource availability and biodiversity, supply chain disruptions or damage to assets from severe weather events such as storms, floods, fires, droughts, tornados, hurricanes/monsoons, tsunamis and earthquakes, as well as rising global average temperatures, rising sea levels and ocean carbonisation.
Transition risks from the much wider set of changes across policy, law, markets, technology and costing to address the mitigation and adaptation requirements necessary for the transition to a low-carbon economy.
Discover Thrive+
CFS Thrive+ Sustainable Growth is our multi asset sustainable investment option. Managed to a sustainable investment criteria it encourages investment in companies with a sustainable business and strong environment, social and governance characteristics.
Why does it matter?
The thinking behind responsible investing is simple. Companies that manage ESG risks and opportunities well may be better placed for long-term success. Many investors also want their money to support better business practices and avoid activities that don't align with their values.
Approaches to responsible investing
There isn't a single way to invest responsibly. Responsible investing can range from simple exclusionary screens to impact investing that measures the non-financial outcome achieved. Most strategies use a combination of approaches.
- Screening – excludes or limits investments in companies, industries or activities that don't meet specific requirements.
- Integration – includes ESG risks and opportunities as part of the investment decision-making process.
- Stewardship – uses shareholder rights to engage with companies, encourage improvements and vote on important issues.
How our responsible investment team applies ESG
Here's how ESG considerations are applied within a FirstChoice portfolio and the role they play in the investment process.
The screening framework – what's excluded
Investment screens used by portfolio managers explain why certain investments may be excluded. For transparency, these exclusions apply to the option's direct holdings. They don't apply to cash, derivative instruments, exchange-traded funds (ETFs) or pooled unit trusts that may be used to help manage the portfolio efficiently. Across the FirstChoice portfolio’s we have two exclusions in place: tobacco producers and controversial weapons manufacturers.
For more detail on definitions see the exclusions part of our active ownership page. For our sustainable options on FirstChoice, you can learn more about the screening framework and exclusions, in the FirstChoice Sustainable Funds Reference Guide.
Active ownership and voting – explained
Sustainable investing isn't only about deciding what not to invest in. It can also involve helping encourage positive change in the companies that are held within a portfolio. Portfolio managers can:
- Engage – meet with company leaders and advocate for stronger environmental and social practices.
- Vote – use shareholder voting rights at company meetings on matters such as board appointments, executive remuneration and climate-related resolutions.
This approach, often referred to as active ownership or stewardship, allows managers to influence outcomes as investors as well as investment decision-makers.
Climate change considerations
When assessing investments, portfolio managers may consider how companies are responding to the transition to a lower-carbon economy and physical risks. This can include understanding potential climate-related risks and opportunities, and how well businesses are positioned to manage change over the long term. These considerations form part of the overall investment assessment process.
Next steps
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Frequently asked questions
Not necessarily. Responsible investment options can perform similarly to comparable mainstream investments over the long term. Some may perform better, while others may perform worse. Responsible investing changes what an investment option invests in, not its goal of delivering competitive long-term returns. As always, past performance isn't a reliable indicator of future performance.
FirstChoice excludes tobacco producers and controversial weapons manufacturers. For defintiions and more details please see the exclusions part of the Active Ownership page. The exclusions don't apply to cash, derivative instruments, ETFs or pooled unit trusts used by the option. For more information, on exclusions in place for sustainable options see the FirstChoice Sustainable Funds Reference Guide.
While the two approaches are related, they're not the same. Ethical investing often focuses on avoiding industries or activities that don't align with an investor's values. ESG investing takes a broader view by considering environmental, social and governance factors, both risks and opportunities, that may affect long-term investment outcomes. At CFS, all our FirstChoice portfolios combine exclusions, ESG considerations and active ownership.
Important information
Past performance or awards is no indication of future performance.
Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and issuer of FirstChoice range of super and pension products. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the responsible entity and issuer of products made available under FirstChoice Investments and FirstChoice Wholesale Investments.
Information on this webpage is provided by AIL and CFSIL. It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the target market determinations (TMD) for our financial products at https://www.cfs.com.au/tmd which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. You can get the PDS and FSG at www.cfs.com.au or by calling us on 13 13 36.