Ethical investment – beyond the oxymoron

Therewas a time, which the pioneers of ethical investment in this country will remember, when investment practices that took account of non-financial criteria were considered in the same vein as business ethics, Microsoft Works or military intelligence, that is, a contradiction in terms.

While ethical investment comes in a variety of complexions, it can broadly be defined as the integration of personal values with (profitable) investment decisions.

There are, it is quite true, several impediments to a broader uptake of SRI/ethical investment in Australia. The two main ones are public awareness and considerable reluctance by ‘gate-keepers’ to acknowledge a worldwide investment trend.

On the first matter — pubic awareness has largely taken care of itself.

About a decade ago, less than 10 per cent of surveyed respondents in Australia had heard of the term ‘ethical investment’. Surveys conducted by Rothschild (2001) and Challenger (2002) show a steadily strengthening level of awareness, 16 per cent and 29 per cent respectively.

While understanding can always be enhanced, further research suggests that, given the chance, some 80 per cent of investors would want to incorporate environmental or social considerations into their investment decision-making.

The media too, has shown considerable interest in ethical investment/SRI from its novelty value in the early days, to treating it as a mainstream contender.

Perhaps the major bottleneck to broad-scale retail acceptance today, is a reluctance on the part of brokers/advisers to embrace what may previously have been viewed as ‘a little out there’, and their discomfort in having to deal with matters of personal values and belief systems.

Such discomfort is probably to be expected. A significant difficulty seems to reside in the new skill set now required of financial professionals. Not only does one have to use the standard template with respect to financial attributes — risk and performance characteristics, along with the usual aspects of ‘style’, but one also needs to understand, assess and incorporate non-financial criteria and how they are applied.

These value propositions often do not sit comfortably within the cold financial light to which brokers/advisers tend to restrict themselves. Yet discerning these features can be seen as simply part of the ‘know your client’ obligations.

As a matter of course, financial planners will assess their client’s existing asset mix, attitude to risk, long-term requirements and expectations. But when it comes to an intimate discussion of values — possible environmental, corporate governance and social goals, well that may be another matter altogether.

Whether a client is comfortable with uranium miners, tobacco or pharmaceutical companies could be construed not only also as pertinent, but also fundamental to a full appreciation of the factors affecting client decisions. In other words, really ‘knowing your client’.

The waters are also muddied at the ‘know your product’ obligations stage, where the range of funds and the methodologies employed all vary. Which criteria/screens do managers use, either negative or positive or in combination. If positive, are they proactive?

What are the implications of a best-of-sector approach? Is ‘corporate engagement’ applied discretely or in unison with other techniques? What is the breadth of exclusions and are they non-negotiable or based on a certain acceptable percentage? Is there a true conceptual difference between sustainable, environmental, green, SRI or ethical?

So advisers/planners are put-off yet again.

The ethical investment industry now comprises more than 20 fund managers and superannuation providers, with the oldest of these having a performance history spanning more than a dozen years. And while performance will naturally vary between fund mangers (just as it does across managers in other styles), AMP Henderson’s research indicates there is nothing inherent to suggest returns are sacrificed. Quite the reverse.

Many masterfunds have incorporated SRI fund mangers, as have major labels such as MLC Financial Planning and Godfrey Pembroke. The creation of ‘fund of funds’ with an ethical bent (despite the sometimes-jarring combinations) is a clear message that the sector is here to stay.

The formation of the Ethical Investment Association (www.eia.org.au) and its third annual conference in September denotes a coming of age. The association’s and others’ desire to create educational courses is recognition of some of the inhibitors to growth, and of what is required to actively assist the industry.

With consumer demand driving interest in SRI products, well-versed advisers able to account for the broader lifestyle choices of their client investors will be well placed to permanently tap into what is much more than a product offering.

James Thier is the executivedirector of Australian Ethical Investments Ltd.