Just over a decade ago environmental issues moved out of the backwoods and into the mainstream.
Just over a decade ago environmental issues moved out of the backwoods and into the mainstream.
At the time the financial services industry was still embryonic and the popular trend towards environmental awareness did not seem to apply to investing.
Things have changed.
Dubbed ‘socially responsible investments’ in the USA where they have already at-tracted a sizeable following, ethical investments within Australia are being seen as a legitimate alternative investment vehicle with solid returns.
Investor Laura Stanley has always had an interest in environmental issues so when she and her partner came into a sizeable sum of money following the sale of property they searched for a like-minded planner. They found one through the Wilderness Society newsletter.
“We are keen to have our money supporting long term, environmentally sustainable ideas,” says Stanley. “Our main intent was for our money to be working towards that type of goal.”
“The other issue we had to examine as investors was what we wished to screen against.”
And that’s what defines an ethical fund, according to Ethinvest’s managing di-rector, Ross Knowles.
“It is the use of criteria which goes beyond financial by looking at social and environmental criteria,” he says. “Early funds avoided tobacco, alcohol and gambling, primarily social issues, but in Australia there has been a growing em-phasis on environment issues as well.”
“Funds vary in approach using a negative screen to exclude certain factors while others also use a positive screen where they look at companies involved in recy-cling or alternative energy, for example.”
Glebe Asset Management’s Steve Poucher agrees.
“The important thing is to find out where clients sit on that spectrum before entering into any investment choice.”
Knowles says it’s important clients understand what an ethical fund is and what ethical investing really means.
“Ethical investing is knowing what money is doing and being comfortable with that. Some people are happy to invest in Telstra as a telecommunication stock but others have kept away due to the privatisation and perceived reductions in staff and services,” Knowles says.
“Most funds which fail to meet the ethical criteria do so because they fail this first test of knowing where the money goes and this keeps investors away.”
It is this wide ranging focus which has also kept some of the bigger fund manag-ers away from ethical funds, according to Hunter Hall managing director Peter Hall. Hunter Hall is a boutique fund manager applying a negative screen and was placed second in the international equities section of Money Management’s Fund Manager of the Year Award.
“I don’t think a larger fund manager can run a non-ethical fund alongside an ethical fund. It’s a whole approach which includes issues such as corporate gov-ernance in stocks under investment,” Hall says.
Knowles contends these differing styles are endemic to the funds in question and have become a standard part of the investment process.
“Bigger fund managers have the sole purpose of maximising returns for unit-holders. A decision has been made that investors are not overtly concerned with these issues,” Knowles says.
“This is not a criticism but the way the market functions and from our chil-dren’s earliest investments in the banking system there have been no questions asked, people have been brought up with it.”
The other reason for the lack of interest from the larger fund managers is that ethical investing is still seen as a niche investment area. However, that will change according to Poucher who says there will be a corresponding growth in ethical investing as attitudes change.
“The next generation is far more interested in ethical issues and more companies are interested in investor concerns. Things like the fuzzy koalas showing up at AGMs is putting pressure on companies to look at the environment and its peo-ple,” Poucher says.
Ethical investing began during the Vietnam War period when college and church funds blocked money going to chemical and armaments companies. In the 80’s com-panies involved with the apartheid system in South Africa were boycotted. It’s a trend, which Hall predicts will continue.
“At some time in the future the economic systems will be consolidated with the environment…This issue is becoming larger in the UK and in the US where the growth in awareness and interest has large fund managers looking into ethical investing.”
Ethical funds in the US have a sizeable mass and generate considerable returns. The Domini 400 Social Index is the oldest benchmark for ethical investing in the US and has outperformed the S&P500 for five consecutive years. The Domini Social Equity Fund has US$1.4 billion of assets and has beaten the S&P for the past three years.
And while local funds have yet to reach the same level of prominence in terms of funds under management, performance or profile, Poucher says this has not de-terred investors.
“Ethical investors accept that returns are not as competitive at times since the funds avoid some of the better performing stocks, but the growth is far better than bank interest,” he says.
“These investors are comfortable with 10 to 12 per cent returns and the majority are accumulators who are not putting part of their investments in but are com-mitted from day one and dollar one.”
Poucher also says this is the result of having an ethical focus as opposed to being more educated than other investors.
“They are not necessarily better educated in terms of investing or even more as-tute just driven to look at their investments in a different light. 70 per cent are not stock pickers and invest across the board but are more aware of what those stocks actually are,” Poucher says.
Hall believes ethical investors will grow more canny in much the same way as mainstream investors.
“They are more interested in the stock market but they have a two tier approach. In the last ten years these investors have gone beyond the core group and so they have been forced to become educated on stocks and the processes.”
“This is in keeping with the general education levels present and has also been driven by superannuation issues.”
But while ethical investors may seek a different path and have a different fo-cus, financial planners still need to explain that even ethical investments may hold traps for the unwary.
“We mention risk versus returns in all our documents and encourage people to look long term. We litter our paperwork with warnings but all you can do is tell people and hope they will listen,” Hall says.
“People need to quantify reasons for investing while being sure there is ade-quate diversification, they should know the way a fund manager screens its stocks and processes and the risks involved,” Poucher says.
“For planners it is the usual role of adding value via their education and knowledge.”
