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Ethical investing

Many investors want their investment holdings to reflect their values, and support companies that behave in ways they consider appropriate or responsible.  That is why growing numbers are getting behind investment managers that are perceived to be doing the right thing on a range of ethical, social and environmental issues.

In this article Roger Green, Marketing Manager for Australian Ethical Investment, looks at ethical investing and how you can invest in the future.

Ethical, or socially responsible investing can take many forms, but according to the Ethical Investment Association of Australia, the most established ways of investing ethically are:

  • Negative screening - which means avoiding some types of investments eg. gambling companies or weapons manufacturers.
  • Positive screening - which involves a preference for activities or characteristics deemed desirable eg. future-oriented industries such as renewable energy and health care.
  • Best of sector - which involves selecting leading firms in every business sector, based on their environmental and social performance or sustainability.
  • Social responsibility overlay - which involves selecting shares for a portfolio in the usual way, but adding a process for addressing issues related to social responsibility.

The socially responsible investment sector is still a small portion of the market with around $21.5 billion total investments, and $3.6 billion of this invested in managed funds.  A recent survey shows that $7.2 billion is invested by employers in super funds with socially responsible investment overlays (survey by Deni Greene Consulting for Ethical Investment Association 2004).  Socially responsible investment is growing faster than the general market, having increased 41% since 2003, and this trend is expected to continue, although perhaps at a slower rate in the medium term.

In the US the socially responsible investment industry has quietly been making inroads, with portfolios in 2003 accounting for around 11% of all investment assets under professional management (D. Nason in The Australian, 11 April 2005) and in the UK socially responsible investments have recently topped £10 billion (Reuters UK, 5 August 2005).

In spite of the rise in popularity of socially responsible funds opponents have argued that by excluding many stocks in a particular sector (for example, resources), such funds will be disadvantaged when these sectors do well.  Even when ethical funds perform well, there has been criticism that the positive performance would be short lived.

This is not the case. While past performance is not a reliable indicator of future performance, many ethical investment funds have performed as well as or better than conventional peers over considerable periods of time. For instance the Australian Ethical Balanced Trust has been a good performer since it was founded in 1989. The trust and the parallel super strategy – the Australian Ethical Superannuation Balanced Strategy – have consistently been among the top performers in their categories over one, three and five years (See results in the multisector 60 categories of managed investments and super in Money Management, 28 July 2005, and The Australian Financial Review, 3 August 2005).

Which just goes to show investors are able to have the best of both worlds by obtaining excellent financial returns while also supporting socially responsible companies.

Under Australian Corporations Law, investment managers are required to show in their Product Disclosure Statements “the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment”.  This is designed to encourage transparency and allow investors to compare one product with another.  However, compliance levels are still patchy with the scope and content of relevant information disclosures varying from manager to manager.

Australian Ethical Investment Ltd is a pioneer in the ethical/SRI field, being one of the longest established ethical funds managers.  Operating with the sole purpose of ethical investment, the Canberra based company commenced in 1986 and currently offers four public unit trusts. It is the parent company of Australian Ethical Superannuation Pty Ltd, the trustee for the Australian Ethical Superannuation fund which was established in 1998.  As at June 2005, Australian Ethical had over $360 million in funds under management.  The management company was listed on the Australian Stock Exchange in 2002, with a primary aim being to improve share liquidity.  The ASX code for Australian Ethical is AEF.

All of the company’s investment activities are guided by the Australian Ethical Charter.  Practical implementation of the Charter translates to avoiding investment in such areas as uranium mining, tobacco production, repressive regimes, native forest wood-chipping, gambling and animal exploitation. On the positive side it means the support of recycling, renewable energy, co-operative housing, sustainable timber production, complementary health care, workplace relations and education.  For its overall rigorous approach, Lonsec (an independent research house) assessed Australian Ethical’s investment screening as ‘dark green’ (the only Australian ethical/SRI manager to achieve this).

For investors selecting an ethical manager, it is important to remember that one person’s ethics are not necessarily the same as another’s.  A decision to invest in social responsible investment funds will depend on your own values, as well as your overall portfolio and financial planning goals.  For this reason, ethical investors often seek funds managers offering a high level of disclosure and transparency in terms of investment process, portfolio listings and detailed reporting.

Ethical investment managers and advisers can be found via the Ethical Investment Association’s membership directory at http://www.eia.org.au, along with further general information on ethical investing.

Roger Green is the Marketing Manager for Australian Ethical Investment, more information can be found on their website http://www.austethical.com.au.

(c) All rights reserved 2005. This article has been prepared by a third party and licensed to ASX. The views are those of the author and not necessarily of ASX. This material is educational and it is not intended to constitute financial advice. It has been prepared without taking account of any person's objectives, financial situation or needs and because of that, any person should, before making an investment decision, consider the appropriateness of the advice having regard to their objectives, financial situation and needs.

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