Ethical screening: an empowering choice

Australians who invest directly in shares know exactly what companies they are investing in. They make their investment decisions according to various financial and personal criteria.

The same can’t be said for the majority of people who have money invested in managed funds and superannuation.

Fund managers could be investing their money in companies whose activities don’t align with their own personal values.

They could unwittingly be profiting from activities such as uranium mining, the sale and promotion of tobacco and gambling products, animal tested products or genetically modified food.

Or they may simply be investing in ways that do no fully account for the variety of environmental, social and governance impacts.

This doesn’t sit well with an increasing number of investors, many of whom are finding ethical investment as the answer.

These investors also have an increasing expectation that financial planners will take account of their non-financial investment criteria and are actively seeking advisers with an understanding of the ethical investment market.

This is backed by ASIC PS 17, which says it is ‘good practice’ to ‘ascertain’ whether environmental, social or ethical considerations are important to the client and, if they are, conduct reasonable enquiries about them.

During the early 1990s, investigations by Australian Ethical Investment showed less than 10 per cent of respondents had heard of the term ethical investment.

This was coupled with a number of misunderstandings including that investing ethically meant sacrificing returns.

Now there’s a heightened awareness of ethical investment in the broader population and there’s an understanding that it has achieved returns that are competitive with, and sometimes better than, conventional funds.

According to the Ethical Investment Association’s 2006 Benchmarking Survey, investment in ethical and socially responsible fund managers grew by 56 per cent in the 2006 financial year and has increased by a massive 3,587 per cent in the past six years.

In 2000, the total invested by Australians in screened funds was $325 million, this figure is now $11.98 billion.

Ethical investors tend to be younger people, female and in caring professions, such as health and education. These people may not have a great amount of funds right now but they are the high-net-worth clients of tomorrow.

There are also an increasing number of well-heeled, baby boomer professionals translating their 60s’ consciousness into how they invest for their retirement.

Ethically invested money is stickier and ethical investors are more loyal. This is because ethical investors are seeking a better world and are not solely focused on the return.

Clients, empowered with an investment choice that is helping to make positive change, help build the client base of their ethical fund or ethical adviser.

Mainstream fund managers recognise the great interest in ethical managed funds and have badged new products accordingly.

The pale-green investments offered by these large mainstream fund managers tend not to differ much from their conventional portfolios.

So while the investor may believe they’re supporting ethical enterprises the reality may not meet their expectations.

These funds are spun off from a parent fund from a mainstream institution. These fund managers adopt a pale approach often couched in black letter, is not from a principled perspective and subject to change and causes general scepticism.

We need to be careful that some of the ‘paler’ options put forward do not become, by default, the only ones perceived.

There is a spectrum of ethical possibilities and it should not be presumed that just because an investor is initially viewed as pale green that the only logical investment is a pale green one.

Deeper green products, more rigorous and stringent in their approach, are likely to incorporate all the desires and requirements of a pale green investor, and more.

Transparency on the part of fund managers is important here.

Ethical funds, by their very nature, should list their non-financial investment criteria and publish a full portfolio listing. Taking a client through a portfolio listing has the added effect of helping the investment come alive in creating a better world.

As well as helping people to invest in line with their values, ethical screening can reduce investment risk and identify growth sectors that conventional funds may overlook.

Conventional funds tend to invest heavily in stocks such as resources and the big four banks whereas an ethical fund manager actively seeks new technologies in emerging growth sectors such as renewable energy, alternative fuels, recycling and water conservation.

As climate change becomes evermore part of the public consciousness investment in such areas can be both financially and emotionally rewarding.

Screening investments in this way assists in avoiding companies that are likely to have serious health, safety or environmental problems in the future leading to fines, penalties and compensation payouts.

There is also a belief that the best long-term, stable returns will come from the support of sustainable businesses, both financially and ecologically, as business is increasingly required to meet the full ecological costs of production.

There is a growing demand from consumers for sustainable products coupled with an enhanced willingness to pay higher prices for these goods and services.

Sustained growth and increased awareness of the ethical investment sector suggests that genuine ethical investment can flourish to the benefit of investors, society and the environment.

James Thier is the executive director of Australian Ethical Investment . He recently received a Churchill Fellowship to study shareholder advocacy in the US and Europe.