The AEF also publishes guidance on why it invests in certain sectors, assessing the criteria against its own Ethical Charter.. Picture Getty
The Ethical Investor: Why Australian Ethical Investment dumped Lendlease, but loves Woolies
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- The Australian Ethical Investment has divested its Lendlease holding
- The ESG-focused fundie explains why it invests in certain sectors
- The AEF also provides some ASX stock recommendations for ethical investors
ESG-focused fund manager Australian Ethical Investment (ASX:AEF) has recently dumped global property company Lendlease Group (ASX:LLC) over the latter’s proposal to develop housing in Mt Gilead, one of the last healthy koala colonies in NSW.
The fundie said it has been engaging with Lendlease on this issue since 2018, with the aim of securing greater protections for koalas, and to ensure the company takes biodiversity security seriously.
The AEF acknowledged that Australia does have a housing shortage, and Mt Gilead is only one example of an increasingly desperate struggle between the need for housing and protecting biodiversity.
“We were hopeful this development could have been a blueprint for how sustainable urban development can be compatible with nature. However, we were not convinced that the koalas will be sufficiently protected,” said the AEF.
According to advice from the Office of the NSW Chief Scientist and Engineer (OSCE), the survival of the Mt Gilead koala colony hinges on the existence of appropriately sized wildlife corridors to provide safe passage across the site.
The AEF says it has serious concerns about the way the reports from the OSCE are being interpreted by Lendlease.
“In our opinion, Lendlease has failed to produce critical information needed to independently assess the impact of its housing development on koalas.”
“That’s why we’ve sold our shares.”
The AEF explains why it invests in certain sectors
The AEF fund invests in companies that are making a positive impact on society and the environment, while avoiding those that are involved in activities harmful to people, animals, or the planet.
The company is known to have an extremely rigorous screening process.
Periodically, the AEF also publishes guidance on why it invests in certain sectors, assessing various criteria against its own Ethical Charter.
Here are some of the AEF’s latest assessments:
Why the AEF invests in banks
The AEF acknowledged that assessing the finance sector against its Ethical Charter can be challenging.
“Bank bashing is a national sport, and with good reason,” the AEF explained.
The fundie said banks deserve criticism on many fronts, including for incidents of irresponsible lending, unconscionable fees, poor financial advice and transaction reporting failures.
“Banks also lend to high-emissions companies and projects that contribute to climate change,” said the AEF.
But despite their shortcomings, the fundie said responsible and well-regulated banks can do good.
“They make loans to individuals to help them pursue their goals, and they fund commercial activity which meets individual and societal needs.”
Banks also help individuals and organisations save, invest and manage risk. Without them we’d be back to a barter system for the exchange of goods, services and capital.
“We invest in both small and large banks provided they are assessed to align with our charter,” said the AEF.
On the climate front, large banks are needed to support the massive shifts of capital needed to combat climate change.
To limit warming to two degrees Celsius (2°C) as part of the Paris Agreement, more than US$1 trillion needs to be invested in clean energy every year through to 2050.
“Smaller Australian banks simply aren’t able to fund large-scale clean energy infrastructure, as they just don’t have the capacity to make loans for big projects,” the AEF said.
But having said that, the fundie said there are ‘no-go projects’ and red lines it will never cross.
“We do not, and will not, invest in any bank which lends to the Adani Carmichael coal mine,” said the AEF.
“Largely as a result of this assessment, we currently exclude ANZ and CBA for ethical reasons – but we invest in Westpac and NAB,” the AEF concluded.
Why invest in the Retail sector
Retail is a controversial segment that requires careful consideration, according to the AEF, but it’s also an essential part of modern life.
The AEF said that when assessing the sector, it generally starts with a positive view of retail companies but it must then consider such things as:
Are the products they sell aligned to our Charter?
Do they promote the irresponsible consumption of negative products?
“No company is perfect, but for us to invest, a retailer must demonstrate genuine commitment and credible action to manage negative impacts on people, animals and the planet,” said the AEF.
For large food sector retailers, the AEF said it will look at the health value of the retailer’s food offerings, how it treats its staff and suppliers, and how it addresses any human rights impacts in supply chain.
The fundie also looks at the retailer’s animal welfare policies, its management of waste and the circular economy, and the environmental impacts in the supply chain.
“And last but by no means least, we seek demonstration of its alignment to the Paris Agreement, and how it manages and reports on its scope 1, 2 and 3 emissions.”
The AEF says that as the two major supermarket chains providing food and other essentials to Australians, Woolworths (ASX:WOW) and Coles Group (ASX:COL) are companies to watch very closely.
“Indeed, they are so large domestically that when they make a change, it can change the entire system – influencing diet trends, climate, animal welfare, biodiversity and human rights.”
“The good news is, we think Coles and Woolworths are genuinely trying to do the right thing, and on balance are having a positive impact on the world,” said Stuart Palmer, head of Ethics Research at AEF.
Coles for example has stated that it will be 100% powered by renewable electricity by the end of FY25, and will reduce its Scope 1 & 2 emissions by more than 75% by the end of FY30, as well as being net zero by 2050.
Why invest in the Healthcare sector
The AEF believes ethical investing isn’t just about excluding negative companies; it’s also about looking for ‘future-building’ investments that will create a sustainable economy while delivering strong returns.
Healthcare is a sector with a huge demographic tailwind at its back.
Like most developed countries, Australia is undergoing a ‘greying’ of its population as the ratio of older people continues to rise – with over 16% of Australians aged 65 years or older.
The AEF says that before it invests in any healthcare company, it will look at a wide range of issues, including whether the company has inappropriate sales and marketing practices (e.g. misleading or inappropriate advertising or inducements to doctors).
The fundie also considers whether the healthcare company is undertaking research responsibly, which includes its approach to trials and testing.
The AEF recommends three ASX listed healthcare companies:
Cochlear designs, manufactures and supplies hearing devices. The devices are designed to bypass the damaged parts of the inner ear by electrically stimulating the hearing nerve. This sends a signal to the brain, where it’s interpreted as sound.
“Cochlear has a long runway of growth based on the ability of its technology to make a difference to a greater share of the world’s population over time,” said the AEF.
Fisher & Paykel Healthcare (ASX:FPH)
FPH has been a long-term holding of the Australian Shares Fund. The company specialises in ventilation hardware and consumables for intensive care patients.
FPH has also developed innovative oxygen therapy technology that has been widely utilised in the treatment of Covid.
“This technology has wider application in multiple healthcare settings that positions FPH well for the future,” said the AEF.
Healius is Australia’s second-largest pathology provider with associated radiology and day hospitals businesses.
The company has now exited its medical centre business, which was a drain on capital.
The pathology industry meanwhile has played a major role in COVID diagnosis, which has supported earnings.
Healius has also recently received an off-market takeover bid from Australian Clinical Labs (ASX:ACL).
Share prices today:
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