Dispelling the Ethical Investment Myth

Do a bit of Googling on ethical or responsible investment and it won’t take you long to find the nay-sayers argue that investing ethically costs more for a lesser return. It is the case that to invest ethically requires digging a little bit more deeply than would otherwise be the case. This extra research costs money. However it if it were true that the more you research, the poorer the outcome, we might as well close all scientific laboratories now, save our money on university research, and adopt the Amish approach that things are about right as they are now, and we’ll just stick with that.

Investing ethically means investing sustainably. A company that sells tobacco products does so in the knowledge that its product kills its customers. Ignoring the moral issues on that for a moment, that doesn’t sound like a very good business and therefore investment proposition.

A company that extracts fossil fuel faces two challenges. One, as it digs out the material, that material isn’t “growing” back. Eventually that mine is all mined out. For the business to continue, it needs to spend money searching for a new mine. And so it’s constantly chasing its tail, using money from one productive mine to find more resources to replace what it is extracting. Its second problem is that the world is taking action on greenhouse gases. Now that action may be less than what the scientists say needs to occur, but nevertheless, most governments around the world are taking some action. So for fossil fuel extractors, they also face a global headwind against their industry. So does this make for a good investment?

How about a company that manufactures products in a third world country and exploits its workers? At some point that exploitation is revealed, with the consequent brand damage immeasurable. Would it not be prudent for an investor to understand if this type of risk exists before making an investment? Simply analysing a profit and loss statement won’t inform you of that potential risk.

Ethical or responsible investment should not be considered “feel good” investment (though hopefully it has that effect for you). Ethical investment makes sense. Don’t you want your money invested in businesses that have positive relationships with a growing customer base? Isn’t it more likely a business will grow and prosper if it is producing a good or service which benefits the communities in which it operates?

But enough on the logic. What do the numbers say? The Responsible Investment Association of Australasia is an industry body that represents fund managers, asset consultants, research house and the like. RIAA’s membership manages over $500billion. In their annual Benchmark Report for 2014 they found:

In Australian equities, core responsible equities funds have outperformed both the ASX300 index, and the large cap Australian Equities fund average, over 1, 3, 5, and 10 years (all measurement periods).

In International equities, they have outperformed the MSCI global index, and the large cap international equities fund average over 5 and 10 years, though they have underperformed over 1 and 3 years.

So yes, responsible investment typically does cost a little more, but that extra research leads to proven superior returns. Who wouldn’t be prepared to pay for that?

How can Guidance help?

We are a financial planning firm that creates bespoke investment solutions for our clients. If you want your retirement savings invested fossil fuel free, with no alcohol of gambling exposure, or with a broad ethical overlay applied to all investments held, we can provide you with a solution. We can access a range options to suit your investment balance, and the degree of involvement you wish to have.

Ethical Investment – take control, make a difference.