SRIs still some way away from nirvana

They may not have safety pins wedged through their noses. Nor do they have ripped clothes or hurl expletives at passing politicians.

However, one of Australia’s top alternative investment sectors — Socially Responsible Investments (SRIs) — has been causing quite a stir in the industry over the past few years.

They are a marketeer’s dream come true. Lots of lovely pictures of rising suns and diving dolphins. A chance to make a difference to the world. And returns are supposedly not negatively affected by one’s golden heart.

In short, SRI funds enable investors to put their social and environmental consciences at ease, without getting their hands (or minds) dirty.

However, while many investors have welcomed SRI funds and their alternative investment counterparts with their green thumbs up, many within the financial services industry have openly questioned the nature and need for such funds in an investor’s portfolio.

While many within the industry attest that the large variety of the funds already on offer provides investors with sound choice, others are raising their voices in opposition.

The opponents to the number of fund managers jumping on the SRI bandwagon argue that the SRI sector is swelling with basically too many business-style funds.

“There are quite a lot of grey areas in SRI, and fund managers who are determined to outperform tend not to be socially responsible,” van Eyk head of SRI research Dr Peter Smith says.

He says based on the preliminary research already undertaken by the van Eyk group, there are various degrees of social awareness in the ever building number of SRI funds. Smith says there are some SRI funds, which will look at alcohol and tobacco and would consider logging to be a socially responsible activity.

It is this confusion over exactly what SRI funds can consider that has led to van Eyk embarking on SRI research. Smith says financial planners are responding to their clients’ demands to know more about the exact nature of the investment sector.

Providing further education and knowledge on SRI funds to both investors and planners is also something AMP Australia’s head of socially responsible funds Michael Anderson sees as a high priority.

He says at the moment the investor market for SRIs is divided between those who have embraced it and those planners and investors wanting more information on these products.

“I think there is a small group who use a very significant part of the useful range of products. Then there is a wider grouping who hasn’t done that. And it would be fair to say [that SRI] it is a pretty new world for many of them. As such, they aren’t necessarily well equipped,” Anderson says.

“I think the extra training that fund mangers have been doing and will be doing will be valuable. Up until now, they haven’t had too many products that the researchers have put on the approved list.”

While the investment environment for alternative investments such as SRIs is arguably better than ever, with more products in the market for retail investors to select from and with planners looking for ways to better the performance of client portfolios, given the volatile economic outlook, there is concern that factors such as the insurance crisis could affect the industry’s development.

The argument goes that while planners want to always advice on products that are well researched, have long track records and good performance, this is even more of the case if they are having difficulties with their professional indemnity insurance.

According to Westpac’s head of governance advisory service Erik Mather, it is not necessary to enter into a debate over the affect personal indemnity insurance and agribusiness issues are having on the demand for SRI funds, primarily because it is too early to tell what factors are influencing SRI take-up.

“It's a potentially unproductive debate to examine planner usage of SRI given the information before us. It's too early to examine their take-up,” he says.

“In terms of PI insurance, there are views that SRI organisations better manage their social and environmental risk, and in time expect that to flow on to the models of professional insurers,” he says.

As for agribusiness, Mather says it is unclear what affect this could be seen to have on SRI investing, given the fragmented and mostly private nature of agribusiness.

“From a sustainability perspective, agribusinesses in Australia may be significantly exposed to contingent liabilities in the form of carbon emissions and salinity degradation.

“While still evolving, the NSW Government has recently created a carbon tax for parts of the energy sector at $15 per tonne of CO2. In the case of salinity, industry estimates suggest a current land repair bill of more than $50 billion,” he says.

“Having said that, the agribusiness sector is not heavily represented within conventional share price indices, so it may not heavily impact on conventional investment strategies.

“Investors have to remember there are three words in SRI, and the third is investment.”

Echoing Mathers’ comment, Anderson says he hasn’t heard anything of these suggestions that insurance and the public downfall of some agribusiness schemes could be having a negative effect on SRI investing.

“[With] agribusiness, I haven’t seen a strong relationship [with SRI]. Some agribusinesses have a greener focus, if its plantation timber rather than logging forests. But it is still very different. For some investors, agribusiness has been focused on because of tax issues,” Anderson says.