When Money Matters

To the casual reader, the term “ethical investment” is one that’s probably laden with both idealism and a certain element of compromise. It evokes making the decision to put your money into, say, providing water for a small African village, rather than ploughing it into car manufacturers or weapons companies or evil fast food chains, even if the latter option is likely to make you a heap more cash than the former.

In reality, the world of ethical investment is a far less black-and-white proposition. It’s also quite a serious industry these days, one that’s grown markedly over the last decade and whose philosophy is making inroads into the world of mainstream finance. And also, suggests Louise O’Halloran — the Executive Director of industry body Responsible Investment Association Australasia — it’s not just about choosing not to invest in Monsanto.

“The industry has been around for about 40 years.” O’Halloran explains. “In that time, it has evolved and matured considerably, and today there’s a large range of options around to suit many different preferences. The key question to ask is, ‘What do I want to achieve from this?’ Over the years, I’ve found that there are three main motivations that draw people to responsible investment. The first is a desire to invest in line with your values. That often involves avoiding certain industries that you may not agree with, or companies that are known to be taking environmental short-cuts or producing products that cause harm. The second reason might be a desire to invest in positive, sustainable industries of the future – much the same as choosing green power or buying a fuel-efficient car.

“Investing in sustainability,” she continues, “doesn’t necessarily involve a moral or ethical position – it could simply be a parent wanting to make sure that they’re leaving the world as a better place for their kids. The third reason comes down to risk, profit and the desire to maximise your chances of doing well in the investment markets. Of course some investors are motivated by all three at once, but it’s important to remember that not all responsible investors are driven by the same motivations.”

In this respect, then, what’s generally referred to as “ethical investment” is a subset of the larger entity that is “responsible investment” — evaluating an investment by reference to the industry’s holy trinity of considerations: a company’s environmental, social and corporate governance-related performance. These are usually referred to as “ESG” issues, with the “G” standing for “governance”. It’s a strategy that seeks to replace the right/wrong considerations of ethical investment with a more pragmatic and less arbitrary criterion: that of sustainability in a changing and ever more fragile world.

Of course, it may well be that you consider investing along these lines to be the morally correct thing to do anyway, but as O’Halloran is keen to emphasise, it’s not only the right thing to do: it’s the best thing to do. “[Responsible investment],” she emphasises, “isn’t [necessarily] an ethical position. You simply need to be interested in the environment, resource scarcity, and the whole idea that we’re undertaking a transition to a new, greener economy. That doesn’t necessarily entail an ethical or moral stand. People who are willing to take a stand for their morals or ethics unfortunately comprise quite a small proportion of the population, but a much larger percentage of the population will take a stand on sustainability, not just because they ought to, but because it will affect their children.”

Clearly, not everyone sees the issue this way. “We have a certification program on our website,” O’Halloran says, “and people will call us and shout, ‘How can you put an ethical fund on your site that has an oil company in it?’ Well, because not all people want to exclude oil companies — it’s not like, ‘You’re an oil company, you’re out.’ It might be, ‘Well, you’re an oil company that has shifted 20% of your assets into renewable energy over the last 10 years, or has extraordinary health and safety systems, precautions and outcomes.’ Some people might be fine with that.”

The good news is that a responsible investment is often also a financially pragmatic one. “Most of the big investment firms across the world have introduced research on environmental, social and governance issues into their investment decision-making,” O’Halloran says. The reason behind this, she says, is simple: looking at these issues is a factor in evaluating the financial outcome of an investment.

In fact, for the broader investment market, this perspective is actually the only option available, explains O’Halloran. “In the world of superannuation and pension funds, there’s something called the sole purpose test, and it’s very central to the whole idea of someone else looking after your money, and the trust you bestow in them to do that. It means that those funds are obliged to pursue investment strategies that will maximise your account balance before any other consideration. There are exceptions — government pension funds, faith-based funds — but in general, that is the law.

“[However],” she continues, “large legal studies have been done that have demonstrated that taking into account [ESG] issues actually supports the sole purpose test, because these issues cause investment values to change, and so taking them into consideration fulfils the sole purpose test. In fact, [analysts] should look at them, because without doing so, you may be putting investments at risk.”

She cites last year’s disastrous BP oil spill in the Gulf of Mexico as a salutary example of what happens when you fail to take into consideration the potential effect of environmental, social and/or governance issues. “One of the things that we now know about BP is that the company’s risk exposure on issues of safety had been building at a rapid pace at its US sites over a number of years. BP attracted 760 egregious wilful [safety] citations at its five refineries across the US in the three years prior to the accident; by contrast, the other 145 refineries in the country had collectively attracted just one.”

In other words, she argues, analysts should have seen trouble brewing. “This is what we call mis-pricing risk. The gap between the company’s share price prior to the spill [around $56] and after [$41] represents issues, factors and drivers that were not known by analysts. The slow demise of the company’s ability to look after its workers and its occupational health and safety — that’s something that the markets didn’t pick up on. But the responsible investment community says ‘we can know more about these things’.”

Deepwater Horizon, then, presents a fine example of where the ethical and pragmatic positions are completely aligned: it was a terrible idea to invest in BP in the lead-up to 2010, both because of its calamitous safety record and the fact that your investment would have lost loads of value after the spill. Clearly, this isn’t always going to be the case — you may very well stand to make a fortune from investing in a company that makes widgets at factories in China staffed by impoverished peasant children, but choose not to do so because the prospect fills you with revulsion. Ultimately, everyone’s decision on what they feel comfortable with is going to be a personal one.

Which brings us to a more practical question: how does one actually go about investing responsibly? Unless you’re comfortable playing the stockmarket and analysing companies on your own, O’Halloran suggests that the best place to start is responsibly managed funds. These are essentially managed portfolios spread across various companies and areas. “They’ll usually comprise between 30 and 50 companies, both Australian and overseas-based,” O’Halloran says. “[Fund managers] will rate those companies across about 200 researched criteria, by reference to a variety of environmental, social and governance-related issues.”

In 2011, there are plenty of funds to choose from, and O’Halloran notes that RIAA’s website has a list of fund managers certified by the Association. “The whole idea of which is to line up the funds that are available so that the reader can compare and contrast the different methodologies used between, say, 15 or 20 different funds and then be able to say, ‘OK, that one looks right to me’.” There’s also a list of similarly certified financial advisers to talk to if you’re uncertain of where to begin (obligatory disclaimer: we recommend you talk to an adviser before making any investment decisions, but that’s just us).

Even if you don’t have spare money to invest, most Australians have at least one asset that they can direct into the area of responsible investment: superannuation. “In Australia, a lot of people belong to super funds that already have an option that’s a responsible investment option.”

Either way, it’s a case of sitting down and evaluating your options and working out what feels right for you. “You’ll know when you see one that strikes you as something you’d be interested in, because it might screen [out] some companies in a way that’s important to you, and it might also reach out into other areas like investing in health, or education, or progressive ideas around pharmaceuticals. There are things that appeal to everyone.”

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