Do you invest your super in companies that manufacture arms and sell tobacco?

04 Jun 2018 03:57 AM

Most people would in principle like to invest their money ethically, but don’t for two reasons:

  • Investing is so difficult in the first place, you can’t even begin to think of adding another hurdle to the task.
  • You are afraid that investing ethically will cost more or jeopardise performance.

What if you were wrong? What if you just continued on your existing path as a result of mistaken beliefs? It’s like being offered a free upgrade to first class, but rather staying in economy.

Investing ethically is widely accessible and has been shown over and over again to improve performance.

When I arrived in Australia 12 years ago, I accepted a role, managing the consulting team at an investment research firm. Within the first few days, the director requested that I write a research paper. As you can imagine, arriving from London at the beginning of the Australian summer, I was completely unenthused by the idea. I used all the bargaining power I could, to at least choose the subject. One of my greatest areas of interest was (and still is) Socially Responsible Investment (SRI).

I set out to understand – how it works and what impact it had on cost and returns.

My first discovery was that the lines of ethics are not always clear- 50 shades of green. For example: Woolworths has incredible community programmes but sells tobacco and Mac Donald’s provides generous support for seriously ill children but is a major contributor to world obesity.

The solution: specialised companies that rank corporations by various environmental, social and corporate governance factors. Each investment manager can then apply screens to their investment universe ie: a company must have a score of at least 9 on environment and 5 on corporate governance before they can be considered for investment. As a result, not only can investment managers focus on different areas of social responsibility, but just like ethics – some are more ethical than others.

Does this impact on cost? We seem to have the notion that if organic food is more expensive, then an ‘organic’ portfolio must be more expensive. In reality, the cost of screens is minimal and any SRI manager that charges more, is simply playing on your lack of knowledge.

Most importantly - how does SRI effect performance?

My core responsibility is  to look after you and your finances, so if performance didn’t measure up, it would be a conflict of interests.

Socially Responsible investment in Australia is tricky. Our market is dominated by mining and banks (no need to elaborate). Therefore an investment manager who wanted to put together a SRI portfolio would be pushed to invest in smaller companies. Smaller companies, by their nature are much more volatile and higher risk. Not great from a performance perspective.

Globally, the story is very different. Companies are more evenly spread between different industries such as health care, consumer staples, information technology and telecommunications. Designing a SRI portfolio is easy. Even when we go back to my original analysis, where I had a whole team of actuaries crunching the numbers, performance of a socially responsible portfolio was always equal or better than a non-socially responsible portfolio.  While this may seemed counterintuitive (if you limit the opportunity set, performance should suffer), the companies that took into account their impact on the environment and society were forward thinking, innovative and successful. Essentially a socially responsible screen weeded out the laggards and enhanced performance.

However it is important to note that performance between socially responsible portfolios varies greatly dependent on the manager’s investment skill. (You can’t just go with the first manager that has the word ‘ethical’ in its name.)

While previously, opportunities to invest in globally socially responsible portfolios were limited to large institutions, today they are widely accessible to everyone.

In essence, investing ethically is much easier than you think, has minimal impact on costs and a positive influence on performance.

Please don’t give up the free upgrade to first class – get in touch to find out how you can have a super or investment portfolio that you can feel proud of.

Marisa@mhwealth.com.au

M:0416538227


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