Ethical Investing recap: The 6 things we now know about ethical investing
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Over the last couple of months we’ve interviewed several people at the top of the ethical investing industry. This has ranged from fund managers at firms which recently embraced ESG, to start ups with ethical investing as their bread and butter.
The industry may not have one clear consensus on what is ethical – only a few bullet points on what is not. But it is vibrant with retail super funds, high net worth money managers, certifiers, start ups and advocates.
From all of our conversations, there are six things we now know about ethical investing.
There’s plenty of consensus on what is ethical, but no fixed framework outlining what is ethical investing. The closest thing is common concern about broader issues (such as climate change and human rights) to which a response (or lack of) may vary.
The introduction of ESG metrics has been important, but different metrics matter to different companies in distinct industries.
This is why Australia’s top ethical certifier, the Responsible Investment Association of Australasia, doesn’t investigate standards of its own. Rather it looks at a certified company’s own standards.
CEO Simon O’Connor was OK if disclosures “are clear and transparent and they match consumers’ view on what they want to see in their products.”
“What we expect from all our members is they have processes in place to manage issues beyond just financial risks,” O’Connor said.
“We don’t prescribe ‘you must not invest in gambling’. There are lots of different views and processes and consumer preferences.”
“We don’t assess the ESG (environmental, social and governance) metrics of a portfolio. We look at it and make sure there’s no inconsistency with the strategy. So if they say no fossil fuels, ExxonMobil is not in it.”
‘Do no evil’, the motto of Google, is a compelling mantra to follow (even if you think they’re hypocrites for saying it). But increasingly it’s not good enough to just pick the ‘least worst’. Investors want their money to do good.
One of Betashares’ ETFs takes advantage of this strategy – BetaShares Global Sustainability Leaders ETF (ASX:ETHI).
CEO Alex Vynokur said this fund, “has resonated strongly with investors”. Talking about the success of this ETF, he said,“I would say why its resonated is because of the strategy. A dark green approach to investing – near enough, is not good enough.”
“The strategy we are following is to exclude completely any entities that are engaging in activities inconsistent with responsible investment and positively allocate to companies that are climate change leaders.”
Goodments’ CEO Tom Culver noted while many US IPOs boomed, his clients were only interested in the ethical ones.
“IPOs like Beyond Meat and Levi’s that are very focused around a futuristic view of the planet – those businesses have been incredibly well adopted,” he said. Conversely his clients avoided firms with privacy concerns, such as Uber and Zoom.
It’s true there are industries that need not apply. AMP Capital completely got rid of tobacco companies from all its products two years ago – not just its ethical offerings. Goodments clients’ most avoided industry is tobacco. But some funds still do invest in mining companies…well some of them.
AMP Capital’s Ian Woods explained while there was a line to be drawn at weapons and tobacco, certain mining companies fell short of the line.
AMP Capital has two principles: one, respect for humanity and the other, the degree of harm of the product. As a result of these tests, AMP excluded tobacco and weapons.
Ethical financial advisor Stuart Barry admitted it was a common starting point that mining was unethical but gave a checklist one could use.
“Some will decide they can live with it, others might say it’s an evil empire. It gets down to a subjective level,” he said.
For example, both Barry and Woods noted the importance of iron ore to steel and in turn infrastructure in Australia and the Asia-Pacific region.
While buying and selling are major points, they are not the be-all and end all. While this is far easier for institutional shareholders, discussing with management is a way to achieve the outcomes you want without selling your investment.
In fact Regnan told Stockhead, as an ESG advocate, many firms come to Regnan first.
Selling a stock might well be a concession you have failed and can’t do anything. But activism is a sign you’re not giving up.
For the company offering the product, whether their own shares or an ETF, they have to proactively seek out certification – at least in the RIAA’s case; and get it renewed.
Portfolio managers monitor their investments on a regular basis. But no company is perfect so what’s most important is meeting what your product says it will.
In regard to climate change and human rights, carbon footprint and controversies were the two synonyms to watch.
With the media, news of human rights abuses or bribery can spread very fast around the world and pose issues for ethical investors. The recent 4 Corners exposure of clothing manufacturers raised many eyebrows.
Ethical investing can actually be better for financial returns because many things watched for can eventually hurt the business.
“I think the reason is the exclusionary analysis that goes into ethical funds, identifying stocks where there might be strategic headwinds or governance issues for the business,” AMP Capital’s Ian Woods said.
Regnan’s Susheela Peres da Costa said, “our version is not so much to focus on the ethics of business but how it might translate into good or bad business results, because that’s what investors also want.
“Often we’re talking about intangible things such as reputation and favour with the regulators – lots of things that can be a problem for business if they don’t watch them.”
We all know people’s view can change as they get older. True as this is, the view that investing should be ethical is not one of them, at least judging by the client base of the firms we spoke to.
TasEthical’s Stewart Barry reported over 90 per cent of his clients were retirees or pre-retirees with reasonable levels of wealth. Regnan’s Susheela da Costa said her clients were exclusively institutional.
But most fascinatingly, some develop ethical desires for investing later in life.
Beyond’s Claire Smith counted herself among the older generation and said she developed the view she could no longer tolerate environmental degradation 10 years ago.
She directly attributed increasing reports and research since then – potentially explaining why ethical investing has risen in that time.
Tom Culver probably summed up the difference between the young and old ethical investors when he said, “both end up at different points – just at different angles.”