Socially responsible investing

My endgame in life is and always will be to do my bit to help leave this world a little bit better off than how I found it. So far, I’ve done an awful job of that. If you’re reading this from any OECD country, chances are that you have too. To say that we have been unkind towards the fauna and flora on this planet in the pursuit of progress and profits would be a gross understatement. As an Australian, my carbon footprint is among the highest in the world, my diet is neither environmentally friendly nor morally justified, and the plastic waste I’ve contributed to landfills and oceans over the years keeps me awake at night.

There are however two practices I adopt to push for sustainability. I vote for progressive policies where it makes sense to do so and I try to put my money into socially responsible investments. Although the former is almost futile here in coal-friendly Australia, the latter can be a very powerful driver of change.

What is Socially Responsible Investing?

Let’s sort out some terminology first. They sometimes call it ethical investment and they also occasionally use the acronym ESG which stands for Environmental, Social and Governance related issues. I don’t know who “they” are and I don’t know why they had to complicate things but just go with it. I will use all three terms in this article, just to keep you on your toes. Socially responsible investing means to look beyond profits and understand whether the organisation you’re thinking about investing in is contributing positively towards society.

It’s not limited to encouraging investment in companies which adopt environmentally green practices. The concept discourages investment in businesses which have a negative social impact such as weapons manufacturers, tobacco producers or birkenstocks (kidding, pls don’t sue), and encourages corporate practices which promote positive social change such as human rights development and racial & gender diversity. Socially responsible investing is growing, and it’s growing fast. Nearly $1 trillion or almost half of all professionally managed money in Australia is now classified as responsible. This figure was $178 billion in 2013.

We all have individual responsibility to do good, but the biggest driver of change comes from a much higher level. Companies have significantly more resources to tackle these sorts of issues than we do. Companies are also the real drivers behind these sorts of social issues. For example, according to Roy Maslen (who established the world’s first carbon neutral equity portfolio) the average Australian doubles their carbon footprint by investing $60,000 in Australian shares. If you think you’re in the clear because you’re adamant you won’t ever have that sort of money invested in the share market, have a think about where your superannuation sits, and where it will sit when it’s worth hundreds of thousands, or even millions of dollars. Your keep cups are important, reusing plastic bags is important, installing solar panels is important, planting trees is important, purchasing carbon credits is important, I’m not taking anything away from that. But we all need to understand that there is nothing worse we can do for the environment than to be ignorant and complacent about how our money is invested.

The heavy hitters don’t seem to care, but change is on the way

The Crestone/Core Data 2019 State of Wealth Report found that less than 18% of high net worth investors hold ethical investments. These type of holdings are seen by high net worth investors as luxuries or charitable investments. However, superannuation funds and universities are beginning to demand that fund managers find more sustainable methods of investing. This is important because these organisations manage money on behalf of millions of people and are therefore catalysts for progress.

This isn’t about the money, but let’s take a look anyway

Contrary to popular belief, socially responsible investing doesn’t mean you have to sacrifice returns. The RIAA 2018 Responsible Investing Benchmark Report found that socially responsible Australian share funds outperformed average large capitalisation (this means large companies) Australian share funds over 3, 5 and 10 year investment horizons. The 2019 report had a similar finding but this time for both Australian and international funds. Socially responsible investing isn’t a new concept, but it’s only recently started to grow in popularity. These funds aren’t yet mature enough for anyone to make informed investment decisions. As such, the data isn’t yet reliable and this data shouldn’t be your only consideration when thinking about ethical investment.

Always remember that there are unique risks with any investment decision you make. You might recall from our discussion in Diversification and ETFs that the more variety your portfolio has in terms of industry diversification, the less risk there is associated with your portfolio. Well, ethical investments almost by definition will carry a greater degree of risk (compared to market funds) due to your investments being diversified across fewer industries. For example, a true ethical fund would rule out any industries which still adopt animal testing practices. This means the fund wouldn’t hold any stock in the healthcare or consumer discretionary sectors. A true ethical fund would also rule out coal and gas investments. Although this doesn’t eliminate the energy sector altogether, the pool of energy investments starts to become narrower.

Whether our politicians like it or not, the market has seen both the social and monetary benefits of moving forward and it’s clear that change is coming. Everyday new managed funds and ETFs are being offered to wholesale and retail investors promising greater consideration for ESG-related issues. I’ve always maintained that it’s not my business where you invest your money and I’m not going to tell you to adopt ethical investment. I would however ask you to consider the ESG impact of the companies you do invest in and query whether this aligns with your personal views on these issues as well as the world’s vision for a sustainable future.