If you are familiar with terms like ESG, SRI or sustainable investing, chances are, you are part of the growing trend of values-based investors seeking to invest in companies aligned with their values.
A recent study by Responsible Investment Association Australia (RIAA) showed the momentum around socially responsible investing (SRI) and ethical investing has accelerated in 2020, with assets under management (AUM) up 17% to $1,149 billion. It found that 86% of Australians expect their super or other investments be invested responsibly and ethically, with 67% of Australians who don’t currently invest in ethical companies, would be most likely to consider doing so in the next 5 years.
There are numerous factors behind the growth. “Consumers are making more sustainable decisions around fashion, food, transport, energy and are now starting to connect their money to their values as well,” says David Rae, non-executive director of RIAA. “We’ve seen large super funds in Australian and pension funds globally divesting trillions of dollars from fossil fuels and tobacco. One of the biggest investors globally, Blackrock is now committed to helping their clients invest more sustainably. And just this month we’ve seen Rest super fund commit to net zero emissions for its investments by 2020.”
The most recent examples are the bushfires, which brought to our attention the link between climate change and more extreme weather events leading investors to divert money away from fossil fuels and toward cleaner and sustainable investments. Whilst COVID-19 put a spotlight on the value of healthcare, medical research and education.
So what are ethical investments and where to start?
Here are 5 considerations when adopting a values-based investing approach.
1. Start with your values
What values do you have that you would never want to violate in order to make a profit? It may be environmental issues as native forest logging, climate change risks or uranium mining. Perhaps it is social issues as gambling, human rights violation, alcohol and tobacco manufacturing, or animal cruelty. Or company greed by way of excessive executive remuneration and poor business ethics, just as in the most recent case of Westpac Bank found to have breached anti-money laundering laws with possible links to child exploitation.
A qualified SRI portfolio manager or certified RIAA adviser, who meets a higher standard and commitment to responsible investment, can explore the areas of concern with you through a fact find and seek to align ethical investments with your values.
2. Do your research
Take time to familiar yourself with the concept of Social Responsible Investing (SRI) or ethical investments.
“Simply put, ethical Investment is a process that considers the environmental, social, governance (ESG) and ethical issues into the investment process of research, analysis, selection and monitoring of investments,” explains Norm Robinson, portfolio manager at Sentinel Financial Group.
“There is a wide array of investment approaches used to manage these non-financial risks – from excluding companies in controversial industries (eg tobacco), to supporting the most sustainable companies (eg clean energy), to making positive social and environmental impacts, alongside generating a financial return.”
However, new data indicates that there is still a gap between those that claim to be practicing responsible investing and those that have embedded these practices through formal policies and accountability commitments including disclosing full portfolio holdings.
3. Screening process
Understanding an investment manager’s screening process in selecting the companies within their portfolio, goes a long way to ensuring that the portfolio you choose aligns with values that are important to you. Broadly, there are three ways that investment managers approach this integration: ESG, negative and positive. Environmental social governance (ESG) integration continues to dominate as a responsible investment approach in Australia as well as in the United States, Canada and New Zealand, with a recorded eighty-seven percent of funds screened this way.
A benchmark report by RIAA , found that thirteen percent of investment managers adopt the negative approach, that is the screening out from a portfolio certain companies, product categories or practices on the basis of reported ‘unacceptable’ practices to generate profits. Products such as tobacco, alcohol or weapons manufacturing, and practices such as animal testing and violation of human rights.
The positive approach suggests that an investment manager seeks to include companies with strong social or environmental mandates, such as manufacturer of products to create renewables, companies like Tesla and Contact Energy.
4. Performance
It has been a long-standing myth that to invest in alignment with your values meant accepting lower than market returns. However, current research shows that values-based investment approach outperformed mainstream Australian and International share fund benchmarks for one to ten year periods, except the three-year term.
“The integration of ESG factors (Environmental, Social and Governance) is becoming mainstream and is just as much about avoiding risks as it is about generate return,” says David Rae.
5. Managed Funds, ETF’s or direct shares
With the ever-increasing growth of values-based investing, there are numerous ways to invest in ethical investments. A traditional method is through managed funds, with a popular option being exchange traded funds (ETF’s) or direct shares. Canstar recently published their top ten high-performing ethical investment funds, which included a list of highly rated managed funds and ETF’s.
Choosing an ethical investment portfolio can seem overwhelming. Working alongside a subject matter expert such as a certified RIAA adviser, will achieve a better outcome in aligning your investments with your values.