21 Mar Your decision to invest ethically
Current investors have never had more choice when it comes to investment opportunities, but with all this choice there’s always been one common objective – and that is to make a profit.
But what if you, as an investor, were able to make that profit by investing in companies or organisations which marry their commercial aims with sustainable, social and ethical values? Too good to be true? Or are we starting to experience a global trend toward sustainability and healthy living which is leading toward strong financial performance?
But firstly, is there even such a thing as true ethical investing?
Paradoxically, the answer is both yes and no. Because we are all driven by different sets of values we all have different definitions of what we consider to be ethical. If you strip down ‘ethical investing’ to its core it can simply be defined as investing with a conscience. No one ethical investment may be perfect at ticking every box for every single one of us, but isn’t it still important to support those companies that are making a conscious, pro-active effort to make a positive change? This positive change can come in three forms:
- Ethical investing – investing in companies that use a moral compass
- Responsible investing – not investing in companies that promote social ills or activities harmful to the environment, such as gambling, tobacco, animal cruelty, pollution etc.
- Sustainable investing – investing in companies of tomorrow, such as innovative technology, renewable energy, healthcare etc.
If investment shifts to more of these companies leading positive change and we start to divest away from unethical organisations, then this creates a fundamental demand shift. This movement has the potential to encourage more laggard organisations in the industry to adopt a similar philosophy resulting in a fundamental supply shift.
But does investing ethically make good financial sense?
The 2016 benchmarking report from the Responsible Investment Association of Australia shows “core” responsible investment funds doubling in size from $25.6B in 2013 to $51.5B in 2015. At the end of 2016 the broader responsible investment industry in Australia accounted for $633 Billion in assets under management.
Australian investment in responsible and ethical investment portfolios has grown at a rapid pace in recent years. At the end of 2016, around $65 billion was being invested within “core responsible investment” managed funds, representing 26% growth over the year. These funds now account for around 4.5% of total assets under management in Australia, which is up significantly from approximately 1.5% of total industry funds earlier last decade.
Ethical organisations also benefit from unintended competitive advantages in that they are less vulnerable to litigation, consumer boycotts and even catastrophes associated with unsustainable practices such as oil spills in the ocean. The devastating effects of BP’s Deepwater Horizon explosion in April 2010, where an estimated 206 million gallons of oil spilt into the ocean over the course of 85 days, is still being felt today. Consequentially, BP has spent in excess of US$56.4 billion in court fees, penalties, and clean-up costs thus far and lost 55% of shareholders’ wealth within a 2 month period. However, even though significant, the financial cost doesn’t even begin to address the damage done to the families of the 11 crew members that lost their lives, the wildlife, the environment and the local economy.
Although “ethical” investing is clearly on the rise, some investors may be dismayed to find what they thought was an ethically orientated investment fund may still be exposed to industries that many values-based investors would be looking to avoid, such as fossil fuel generation, armaments, gambling, tobacco, junk food and alcohol.
Investor preference is a key driver behind the increase in responsible investments. Given the environmental and social pressures facing our planet, many more investors are seeking out investment funds that only invest in companies consistent with their values. As seen in the chart below, for example, global CO2 levels are now very high by historic standards.
But responsible investing is increasingly not just a matter of conscience – it can make good financial sense in its own right. Not only is consumer spending shifting toward companies that are considered greener and more socially responsible, technological innovation in the energy sector is also favouring companies less reliant on producing or using fossil fuels.
Some funds are more “ethical” than others…
One challenge for socially minded investors is that there is no generally agreed definition of what constitutes an “ethical” or “responsible” investment fund. Indeed, as noted above, it may surprise some investors to know that some funds that label themselves as ethical may actually include exposure to fossil fuel producers, while others can include companies engaged in a range of other activities such as gambling or tobacco.
If in doubt, investors are encouraged to look “under the hood” at what companies their ethical fund actually holds and/or review the fund’s screening methodology within its product disclosure statement.
If you would like to know more, talk to Michael Sik at FinPeak Advisers on 0404 446 766 or 02 8003 6865.
Important information and disclaimer
The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out.
FinPeak Advisers ABN 20 412 206 738 is a Corporate Authorised Representative No. 1249766 of Aura Wealth Pty Ltd ABN 34 122 486 935 AFSL No. 458254L No. 409424