Investing in a way that helps to save the world does not mean sacrificing returns. In fact, performance data consistently shows that investing ethically leads to better financial results. This is borne out by the latest annual study by the Responsible Investment Association Australasia (RIAA), which was released this week, and compares mainstream managed funds with ethical funds.
Ethical funds that invest in Australian shares outperformed their mainstream counterparts by 3 percentage points last year. The report shows the margin of 3 percentage points has been maintained between 2002 and 2012.
Investing ethically seems like commonsense. After all, there have been plenty of examples of the share prices of listed companies suffering because of the mismanagement of environmental, social or corporate issues, says RIAA chief executive Simon O’Connor.
More big fund managers are incorporating ”sustainability” principles into their investment processes. But they go by a range of potentially confusing names – ”sustainable” and ”responsible” or ”socially responsible”. To some investors, ”sustainable” could mean investments where the investor’s capital is likely to be secure and whose income is reliable, when it actually means the business is sustainable.
The sustainable funds of most large managers will invest in mining companies, says David Macri, the chief investment officer at Australian Ethical Investment. The manager might decide that the sustainability practices of one miner are better than another and invest slightly more in the miner with the better practices, he says. It means an investor with a fund that invests sustainably could have more of their money invested in a big miner with uranium operations, for example, than any other stock.
”We are hugely different from the mainstream,” Marci says. ”We knock out resources.”
The funds run by Australian Ethical will not invest in any companies involved in a range of industries, including tobacco, alcohol and gaming. It means that its main Australian shares fund is tilted to smaller companies and that is reflected in its title, Smaller Companies Trust. It also means that the returns are likely to be quite different from the performance of the Australian sharemarket overall.
Trevor Thomas, the managing director of Ethinvest, a financial planning business specialising in ethical investing, says the firm prefers to run its own ethical share portfolios for its clients, many of whom have their own super funds. Most large fund managers will still invest in coal miners, or those with uranium operations, he says. ”With our investors, there is a zero-tolerance approach; they do not want any uranium or coal,” Thomas says.
Of the largest 50 companies listed on the Australian sharemarket, Ethinvest will not invest in about 20 of them. ”Those companies that are forward thinking about the way they treat people and the environment are likely to be those that are around in 20 or 25 years time,” he says. ”They are more likely to be good long-term investments.”
Perpetual is a fund manager with a long history of voting its shares in companies at annual general meetings and taking on company managements and boards to improve corporate governance.
Perpetual’s deputy head of equities Charlie Lanchester says environmental, social and corporate governance factors are integrated in the Perpetual investment process for all of its funds. Its Wholesale Ethical SRI Fund, which invests in Australian shares, does not invest in some stocks. Morningstar data shows the fund returned more than 38 per cent last year, the second best-performing large companies Australian shares fund.
Its long-term performance is also very good. For the 10 years to the end of 2012, the Wholesale Ethical SRI Fund produced an average annual return of 13.49 per cent.
Ethical standards cannot be applied universally. Some people find investing in uranium OK, others don’t. It comes down to the investor’s views and then finding the fund that best reflects those views.
Read at the Sydney Morning Herald