What Is Ethical Investing?
Looking under the bonnet of ethical investment.
Originally ethical investing was simply excluding companies whose business activity was unhealthy or socially unacceptable, such as tobacco and gambling. Here you can see well-known Australian companies with direct or indirect exposure to ‘unacceptable’ sectors.
|Sector||Direct Exposure||Indirect Exposure|
|Gaming||Wesfarmers, Woolworths, Tabcorp, Crown||Telstra|
|Alcohol||Wesfarmers, Woolworths, Treasury Wine, Coca-Cola||AGL, GPT, Auckland Airport, Qantas, Harvey Norman|
|Tobacco||Amcor, Wesfarmers, Star, Metcash, Caltex, HT&E|
|Defence||Telstra, Lendlease, Bluescope, Qantas, CIMIC, News Corp, TPG|
|Uranium||BHP, Rio, Syrah Resources||WorleyParsons, CIMIC, Sirtex|
|Fossil Fuels||Origin, AGL, Macquarie, Woodside, BHP, Rio, S32, Wesfarmers||CBA, Westpac, NAB, ANZ, Brambles, Lendlease, Suncorp, Woolworth|
This Can Be An Overly Simplistic Approach
Just because a company does not operate in an obviously unethical sector, does not mean it has good values.
- What is the representation of women both on the board and in management?
- What about the supply chain, do they have overseas suppliers who use child labour?
- Are the internal benchmarks and remuneration aligned to the greater good or just to shareholder value and executive bonuses?
How would you judge a company working within a conflicted industry to make it better for the future?
For example, AGL could be screened out due to its direct exposure to fossil fuels (through its core activity of energy production and distribution) and indirect exposure to Alcohol, but AGL also happens to be the largest investor in renewable energy in Australia. Should AGL be supported or avoided?
Positive screening is used to score companies on the basis of their positive impact on society and the environment, to decide if they are to be included.
Matching Your Specific Ethical Goals
Most superfunds offer an ethical option, and this is an easy way to orientate some or all of your super to this theme. The options offered by industry funds are generic funds and it’s not always easy to see their overall approach. However this is a simple way to start investing ethically.
On a retail platform we are able to build a custom portfolio which can match your specific ethical goals, using a mix of funds and direct shares.
Exchange traded funds (ETFs) are a cheap way to access an ethical positioning. Managed funds will charge a management fee and there is a lot of choice in funds which are labled ‘ethical’. At miPlan we can help you choose the right balance of funds and fees.
Asset Choices & Returns
Performance and volatility in ethical investing.
Better Long Term Outcomes
We have much greater control over Australian shares, where we can pick stocks directly.
- If a client would like exposure to wind farms, Infigen Energy is listed in Australia.
- If a client would like exposure to recycling, both Bingo and SIMS are listed here.
In all other asset classes, we rely on fund managers, with their own definition of ethical (each having a different one of course). Fortunately specialised strategies have emerged over the last few years, especially in international shares.
Some research points to the fact that ESG investing can lead to better long-term outcomes. However:
- These studies are conducted at a global level, not in Australia specifically.
- It is the G (governance) that leads to higher returns, while the E (environment) and S (social) tend to be neutral.
Shouldn’t Governance be part of traditional investing due diligence?
- Even if properly designed, an ethical process is not enough in itself and must be combined with traditional investment processes, like asset allocation.
- Underperformance in the medium term is not only possible but likely, because an ethical portfolio will be very different in its composition, and will experience periods of outperformance and underperformance versus the benchmark.
To what extent are you willing to compromise on performance and volatility for the sake of ethical investing?