'Socially responsible' is a phrase now appearing more widely in the glossy brochures of the investment industry. And it's here to stay, as Georgia Loney finds.
What is my money doing in the world? It's a question all Australians should ask themselves. In a country of compulsory superannuation, many of us don't know that our superannuation funds - or other managed funds - could be investing in businesses we may not agree with ethically. Some of us would be shocked to find our superannuation dollars invested in resource companies with poor environmental records, or our savings entrusted to a managed fund that's chosen a tobacco company as part of its portfolio.
Luckily, more Australians are asking about what their money is doing and insisting the response is both morally and financially justifiable. Where once people were concerned mainly with monetary returns, more now also want their investments to help make the world a better place, through supporting companies with values that are compatible with their own.
James Thier, director of pioneering Australian ethical finance company Australian Ethical Investment, says a sea change is taking place. "People are saying: "I do ride my bike and recycle my rubbish, but when I invest my money in the stockmarket, what does that do? Does it go to a company that pollutes rivers or the ocean I want to swim in?" he asks. Thier then poses a challenging question: "You could be trying to do the right thing, but are you contradicting this -completely overriding it- through what you chose to do with your money?"
'Socially Responsible Investment' (SRI) is booming in Australia. Money Management Magazine reported last year that funds under management had jumped by 41 per cent to $21.5 billion in 2003/2004 financial year. According to the Ethical Investment Association, the number of managed funds that describe themselves as 'socially responsible,' has increased substantially from only 10 funds in 1996 to around 90 at last count. And more superannuation funds now offer their members the opportunity to invest in a socially responsible manner.
It's all based on a belief that it's possible to 'do well out of doing good' And there is plenty of cold, hard proof that socially responsible investment works. Most encouraging is a recent study of Australia's top 300 listed companies. Fund manager AMP Capital Investments found that companies considered more 'socially responsible' outperformed those perceived as less responsible by 4.8 per cent over four years and three per cent over 10 years. As reported in the Australian Financial Review in March, AMP also reckons that, on average, Australian socially responsible investment funds have outperformed the S&P /ASX 200 Index over the past three years.
This is great news for those investors who've been putting their money where their mouth - and heart - is. Socially responsible funds have long fought against the perception that by excluding certain stocks on ethical grounds - traditionally many exclude the 'sin stocks' of tobacco, alcohol and gambling - their ability to make the best possible returns is restricted. The AMP study backs up what supporters of 'ethical investment' have long been arguing - that being socially responsible won't hurt your hip pocket and, in a more directly positive outcome, may enhance a company's performance.
What exactly, then, is 'socially responsible investment'? What makes a company 'ethical'? This is where opinions differ. There is no universally accepted definition among fund managers. An 'ethical company' is one that matches your personal values, so as an investor, the responsibility is on your shoulders to enquire whether your fund manager's views sit easily with your own.
James Thier describes Australian Ethical Investment's approach as "conviction-based" - the company has a clear set of principles which outline what should be avoided - and encouraged. For example, AEI's principles mean they refuse to be involved in tobacco production, alcohol production, or repressive regimes, says James. "We avoid any company that engages in activities that 'extract, create, produce, manufacture, or market materials, products, goods or services which have a harmful effect on humans, non-human animals or the environment'. Avoidance of certain stock, commonly called 'negative screening', is a basic component of most ethical funds.
A key activity of most ethical funds is supporting companies that are, as Thier says, "doing well out of doing good"; Quantum Technology is one such company. The Sydney-based operation makes software and hardware for the sight-impaired, such as the 'Mountbatten Brailler,' a computer device that converts Braille to English and English to Braille. The company is successful, says Thier, as it exports the Mountbatten Brailler to 23 different countries." Australian Ethical Investment owns 49 per cent of the company - and distributes the profits to its fund holders.
There are plenty of other ethical company success stories, among them Maleny and Districts Community Credit Union, a Queensland-based credit union circulating money within its local community. It has a policy of encouraging loans for socially and environmentally responsible purposes and donates a percentage of profits to community funds. AEI also supports Tallawara Valley, a partnership operating a farm west of Esperance, in Western Australia's environmentally fragile eastern wheatbelt. The property retains extensive remnant vegetation and was certified Demeter by the BioDynamic Research Institute in 2000, a clear case of 'doing well out of doing good."
Ethical funds in Australia occupy a very broad church, however, and Australian Ethical Investment is undeniably at the less compromising end of the market - which it happily admits. It has been outspoken in what it refuses to hold stock in, namely BHP Billiton -because its environmental incidents in the past - and asbestos products company James Hardie. While proudly occupying a place on the 'extreme' end of the ethical investment fund market, Thier says this doesn't affect the performance of its managed funds, most of which perform as well, or better, than conventional funds in the long term.
Many other funds take a different approach, often called 'best of sector', where organisations are chosen as being the most sustainable in their particular sector. Francis Grey is a research coordinator with investment group Sustainable Asset Management (SAM), and a consultant economist to the Dow Jones Sustainability Index. SAM prefers to view investments in terms of their 'sustainability', a term, Grey says, that incorporates ethics and social responsibility. "A 'sustainability leader'," he says, "is an organisation that is taking us towards the future in front of their peer group."
Another way of looking at it is one that best tackles the challenges of social and environmental issues in a way that delivers the best returns for the shareholders, regardless of what industry sector it occupies. "Perhaps a chemical company may have had an environmental incident - perhaps a chemical spill. They could still fight back from that and become a sustainability leader," says Grey. "They could say: 'We're not going to discharge into the river anymore. And we're going to do it in such an innovative way that our production costs will go down. And when a company does this, their competitors are forced to cut their production costs and stop discharging into rivers, meaning better environmental outcomes, in fact, better outcomes all round."
The SAM group has a rating index of the top 200 Australian companies to assess their performance in terms of sustainability and to identify the top 20 or 30 percent. Grey adds that the measure is relative: "That is, relatively speaking, they are better than the rest, but on an absolute basis they could still be quite bad." SAM invests in a wide range of sectors, including resource giants like BHP Billiton, the world's largest mining company, and Rio Tinto which holds uranium operations.
There is a huge demand among investors, he suggests, for companies to 'do better'. "People are expecting more from companies across the board. They are interested in a company's safety record, how they reward their staff, how they handle corruption." Other factors that make a company sustainable, according to SAM's rating system, include a strong policy on corruption and whistle blowing. Being assessed in terms of sustainability is a powerful incentive for companies to 'lift their game' so to speak, as it attracts investors.
The focus of ethical funds differs across the world. Many Australian ethical funds, like Australian Ethical Investment, have an ecological focus, reflecting the concerns many Australians have with our large resource companies. In the United Kingdom and Europe, ethical funds which invest in companies that champion animal welfare are popular - the large number of pharmaceutical companies makes animal testing a real concern. Francis Grey says that, in Germany, an ethical fund that avoided alcohol would be unpopular: "They're a nation of beer drinkers," he laughs. "However, in Norway, they are much more puritan and like to avoid alcohol stock." Australians, he says, disagree with most European investors and have strong views on funds that invest in tobacco.
Investors should be aware of the different ways that 'socially responsible', 'ethical' and 'sustainable' can be interpreted by fund managers. "It's very important for an individual to be comfortable with the way a term like 'sustainable' is used," James Thier says. "As an investor, I have to be very clear about what is purported as ethical. You have to see what a fund is in and why they're in it. This makes it easy to see whether your values are being matched."
Thier's advice to anyone looking to invest their money in a way that expresses their values is to demand a high level of transparency. "Ask 'What is it?' 'Who is it?' and if people are not getting that information readily, they should ask whether they are with the right fund manager." And while many reports suggest ethical funds do better than - or, at least, as well as - conventional funds, there is a wide variation in returns. Seek advice, ask questions and make an informed choice
There may be different approaches to 'ethical investment,' but the general trends are heartening news for those who are concerned about the future, and the sort of world we will be living in 10, 20 or 30 years. More and more companies are looking down the track and making changes for impending environmental challenges. More investors are looking to support companies that make the world a better place. And, on the whole, it should pay off - by investing ethically, there is no reason to sacrifice returns.
DISCLAIMER - This article is intended for information purposes only and NOVA Magazine cannot be held accountable for any investment decisions based upon the information or viewpoints contained in.
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