Ethical investing - good for planet and portfolio returns
Responsible investment funds have outperformed several benchmarks.
People have always had conversations about the weather, but these days they tend to be accompanied by an ominous sense of urgency: “It's unseasonably hot, isn't it?”, or “A heatwave in July?”
Social media activity, too, is teeming with conversations about wildlife conservation, biological pollutants, rampant consumerism, overfishing, land degradation, toxins and waste. Bookstores are filling up with titles such as ‘Plastic: A Toxic Love Story’, or ‘The Ripple Effect: The Fate of Freshwater in the Twenty-First Century’.
It's little wonder that ethical investment managers have witnessed an unprecedented deluge of super and investment money into their socially responsible managed funds, totalling about $633 billion in assets under management at the end of last year.
Investors, it seems, are worried about the state of the planet for their children and grandchildren, a wall of worry that's overshadowing other concerns. Understandably, too, because a 0.2 per cent discrepancy in returns is trivial compared to having fresh water to drink and clean air to breathe.
So far, however, many ethically minded investors have not needed to sacrifice investment returns for their conscientiousness. Core responsible investment Australian equities funds have outperformed the ASX 300 and the average large-cap Australian equities funds across one, three, five and 10 years, according to the Responsible Investment Benchmark Report 2016.
Heightened investment performance could, in theory, be attributed to the lower risks of investing ethically. In other words, companies that do not give a hoot about externalities (or the social and environmental costs of their actions) are potentially higher-risk candidates for encountering disasters, mishaps, and/or heighted government regulations, which could, at some point, pummel their share price.
On the flip side, companies that keep public perception top of mind, such as those involved in more “community minded” and “sustainable” activities, are more likely to win the hearts, minds and pockets of investors, both retail and institutional.
How to invest ethically
The simplest method is to buy shares in a listed company that you deem ethical.
To narrow down which stock to choose, you can follow the industry standard by “negative screening” for suitable candidates (avoiding companies that have a negative social or environmental impact) or “positive screening” (buying companies you believe have a positive social or environmental impact).
For instance, if you have an aversion to uranium mining, coal-seam gas, logging and gambling, you could negatively screen all companies engaged in these activities.
Alternatively, you could handpick stocks you feel have a positive effect on the environment, or the community at large, therefore positively screening to deliberately hunt down certain renewable energy or recycling companies, for example.
If you are not comfortable playing analyst and selecting your own stocks, you can invest in an ethical listed investment company (LIC) fund, exchange-traded fund (ETF), or unlisted managed fund, which are essentially baskets of stocks handpicked by a professional manager. In your superannuation, these funds may be recognised by names such as ethical, socially responsible or sustainable.
However, do not be surprised to see big miners or energy companies proudly taking out top spot in the “top 10 holdings” for some of these funds. Because some funds may negatively screen out certain industries (and mining may not be one of them), as opposed to positively screening for companies that are good for the planet.
One of the oldest and so-called greenest ethical managers is the ASX-listed fund, Australian Ethical Investment, which targets stocks it believes are positive for the environment and society. It shuns heavy industry, mining and other old-world industries such as coal and oil, in favour of healthcare, technology and renewable energy producers, which it calls more "forward-looking" industries.
The fund invests in companies such as Computershare, MYOB, Adobe Systems and telecommunications stocks such as Telstra.
But even finding stocks in healthcare, telecommunications and information technology is tricky because these sectors are not immune from externalities either. The fossil fuels and chemicals required to, firstly, manufacture electronic gadgets such as computers, and then run them, creates a monster footprint.
Many tech products also end their short shelf lives in mounting landfills. And the healthcare industry comes with enormous waste and hazardous effects on waterways from pharmaceuticals usage.
Clearly, such factors have to be taken into consideration when locating stocks that are "positive for the environment and society at large".
Other managers, such as the Future Generation suite of LICs, take a different approach to investing with a social conscience. The managers donate 1 per cent of net tangible assets each year to a select group of charities; just recently, $4.7 million was given over to Australian youth and children's charities, for example.
The good news is that you can take your ethics to the investing table and it might not come at a financial cost to you either. First, decide what matters to you, and then go forth and find a company, or fund, that is aligned with your own brand of ethics.
Research and Surveys has information on long-term investment themes and trends.