All that glitters is not gold – it’s green. Why ethical investments are going places.
It’s time to throw out the idea that ethical funds are expensive and perform badly.
Increasing engagement with ethically minded investors has put environmental, social and governance (ESG) issues squarely on the agenda.
Fund managers now realise that to attract this audience of socially aware investors, they must prove you can help save the world without sacrificing returns.
In their infancy, ethical funds tended to be aimed at a passionate but small proportion of niche investors.
In those days, portfolios were far from efficient and asset managers expected investors to bear the extra cost of research and compliance that funds needed in order to achieve ‘ethical’ status.
This meant that ethical managed fund options were often more expensive which, combined with the difficulty in understanding the standards investors would accept as appropriately ‘ethical’, meant returns usually suffered.
Fast forward to today, and amid growing engagement from investors and society as a whole, the responsible investment industry has gone from strength to strength.
According to a 2014 report by the Global Sustainable Investment Alliance (GSIA), assets in sustainable investments rose 61 per cent, from US$13.3 trillion at the outset of 2012 to US$21.4 trillion at the start of 2014.
Some estimates say about a third of all the professionally managed assets in the world today are in responsible investments.
Furthermore, institutional investors in Australia are leading the change.
Investment in responsible investments in Australia grew 51 per cent in the 12 months to 31 December 2013, according to the latest available stats from the Responsible Investment Association Australasia (RIAA).
So what is responsible investment?
Responsible investment means different things to different people.
Taking a strictly ethical approach will limit the universe of stocks a fund manager can invest in, screening out industries such as tobacco, gambling or munitions.
However, it can also mean investing in companies that provide a tangible social benefit, such as sustainable energy.
Activist organisations have sprung up all over the world to encourage large asset owners to divest, or sell, their shareholdings in socially or morally irresponsible companies.
But while the divestment issue has attracted plenty of media coverage, professional investors believe that there is an argument for investors to engage with company managers rather than simply sell their holdings.
Some managed funds see a link between being a long-term owner and ethical stewardship.
They have engaged with the companies in which they’ve invested and in some cases have set up working groups to address ESG issues, such as investing in fossil fuels.
Returns don’t have to suffer
These days, investors don’t have to choose between having great returns and doing the right thing, as there is now alignment between socially responsible investing and good investment performance.
A recent study by US investment bank Morgan Stanley analysed the performance of more than 12,000 funds that aim to achieve environmental and social wellbeing. It showed that sustainable equity mutual funds met or exceeded median returns and were less volatile or equally as volatile 64 per cent of the time during the seven years examined.
The study concluded that sustainable investing can be a smart way to invest and that preconceptions regarding sub-par performance of ethical funds are out of step with reality.
Growing choice for DIY super investors
By adding an ethical dimension to your self-managed super fund’s investment portfolio, you and your family will know your money is going some way to improving the world. It’s also a great way to teach children about having an impact in a positive way.
The great news for investors is that a whole range of instruments now exists to help them invest ‘greenly’, but also within their comfort zone.
Some traditional managed funds invest in companies that focus on clean energy, energy efficiency, medical breakthroughs and innovative technology. They avoid investing in companies that cause harm to society and the planet, such as coal and uranium mines, logging businesses and companies that have poor working conditions. They also steer clear of tobacco stocks, weapons manufacturers and gambling companies.
SMSF investors can get access to some managed funds with as little as $1000 and can invest in all the major asset classes. For more risk-averse investors, there are ethical bond funds that exclude bonds issued by companies whose primary focus is in harmful industries. For a low cost option, the number of exchange-traded funds with an ethical bent is growing all the time, as more and more ESG products are entering the Australian market. Some of these new products create new investment opportunities that can offer investors a lower risk and higher return than index investing, along with a defensive strategy with improved diversification and ESG performance – an attractive concept for long term investors.
SMSF trustees are also allowed to invest in property within their superannuation set-up. Purchasing environmentally sound homes, equipped with solar panels or energy efficient insulation, is one way investors can lower the carbon footprint of their portfolio via a tangible investment choice.
The opportunities to invest your money ethically have never been greater. If you’re still not sure exactly which way to go, tell your financial advisor that you’d like your portfolio to reflect your social and moral values and they will be able to guide you accordingly.
There’s a lot to like about ethical investments. With the potential to offer solid returns and innovative investments, as well as flexibility and peace of mind, they can be a valuable addition to any super portfolio.
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