Investing Ethically

Ethical investment funds aren’t new.

Some people have always shunned investments associated with harmful activities such as uranium mining, deforestation and arms manufacture. Instead, they’ve looked for opportunities in renewable energy, education and healthcare.

Trouble is, most people understood that having an ethical investment bent often meant accepting substandard returns.

That’s not the case these days. Over time, fund managers have increasingly offered ethical alternatives to mainstream investments, with comparable returns.

Some managers apply a filter (sometimes called a negative screen) to a universe of stocks, removing those that don’t pass certain tests. That screen could exclude investment in companies involved with alcohol, tobacco or mining.

Others apply what’s called a positive screen, actively seeking businesses making a positive contribution to society or protecting the environment.

Where problems start to arise is that there’s no single definition of an ethical investment. A company providing a particular product or service might be fine to one person, but totally unacceptable to another.

As an example, one Australian ethical super fund refused to invest in Ansell, one of the world’s largest suppliers of protective gloves, used in a range of industries including healthcare. Yet Ansell also manufactured condoms, and the fund’s ethical screen excluded businesses associated with contraception.

Another fund was happy to invest in Ansell, and also held shares in Thorn Group. For years, Thorn has been a target for consumer advocates, who claim the company took advantage of lower income earners. Some years ago, Thorn was forced to refund $20 million to customers after breaching consumer credit laws 280,000 times.

The second approach, applying a positive screen, also has its problems. In the past, funds that deliberately sought investments making a positive contribution often invested heavily in wind farms, and underdeveloped energy technologies.

As a result, despite those environment credentials, it became difficult for the manager to attract much interest from investors due to poor investment returns.

Enter sustainable investing, sometimes called ESG (environmental, social and governance) investing

Sustainable investing is a much broader approach than simply judging a company’s ethical standards. It involves considering not just a company’s potential future shareholder returns, but its approach to managing its environmental impact, how it deals with staff and customers, and its standard of governance and corporate behaviour. In other words, sustainable investing seeks businesses that reward shareholders, but also make a positive contribution to society as a whole.

Increasingly, companies are measured on their ESG values, with institutional investors and financiers shunning those who rate poorly against a range of ESG measures. While not yet mandatory, there is pressure on Australian companies to move towards the disclosure requirements of the International Sustainability Standards Board (ISSB).

A recent PricewaterhouseCoopers report found while reporting standards were improving, there were compelling reasons for companies to accelerate that progress.

“Companies that develop a financial understanding of the impacts of sustainability and climate change, and take them into account in regular decision making, can gain significant competitive advantages,” the report suggests.