Somewhere between evil capitalists and tree-hugging hippies is the ethical investor: caring about not doing harm, but also wanting to make a profit.
Socially responsible or ethical investing often conjures up images of tree-hugging hippies more interested in hydroponics than hedging their portfolios.
But hold the herbal tea – lately ethical investing has outperformed the best and brightest, transforming it into one of the fastest growing sectors in the financial world.
Times have changed
Like Bob Dylan sang, “The times, they are a changin'”. In the eighties greed was good; stock markets boomed and consumers spent vast amounts of money on hairspray, shoulder pads and skinny ties.
Thankfully attitudes (and fashion sense) are starting to change as investing moves mainstream. According to the Australian Stock Exchange’s annual shareholder survey, 51 per cent of Australian adults now own shares directly or through a managed fund.
Australia is one of the wealthiest countries on the planet, and compulsory superannuation has given each of us control of that wealth. Prosperity breeds power – and the ability to make a difference.
Learning from Live 8
Recently we saw this when some of the best musicians of our generation (and Tina Arena) united under the banner of Live 8 to shed light on the problems facing Africa.
Live 8 was much more than a concert to be bootlegged and file-shared across the internet. It also illustrated the importance of not blindly investing money in something that appears to be ethical unless you know how and where your dosh will be invested.
There are people who believe the best investing gains come from the ‘sin’ industries, such as tobacco, alcohol, gambling and television networks that produce reality television.
You don’t have to be a financial whiz to work out that investing in companies that harm the environment or society are inherently risky. Tobacco companies are now paying out billions of dollars in compensation, gaming companies are heavily taxed, and oil companies are forced to foot the bill to clean up their ocean spills.
Sometimes it’s the companies making a positive difference to our lives that offer the safest investments.
“Sometimes it’s the companies making a positive difference to our lives that offer the safest investments.”
According to the United Nations there are about two billion people that don’t have access to clean running water. Perth-based company Solco Ltd provides water treatment solutions for some of the poorest countries such as East Timor – and they make a profit for shareholders in the process!
We all know banks make money, but Bendigo Bank is making money where the big boys fear to tread. When the majors shut up shop, Bendigo’s community bank network comes in. This week Bendigo Bank announced that profits from this project had doubled.
On face value it may appear noble to invest your life savings in biodegradable manure, but unless you want to be eating it in retirement it’s important to take a look at how the pros pick ethical companies.
The screening process
Most ethical managers (like the judges on Australian Idol) have a two-stage process of determining whether a company is fit to be included in their portfolio.
The first is a negative screen, where ethical managers will screen out companies based on their products or services being undesirable on ethical grounds, which may include alcohol, tobacco and mining companies with a poor environmental record. This process is not unlike Kyle, Mark and Marcia screening out an Idol wannabe because they can’t sing.
Some fund managers take the process further by performing a positive screen – actively looking to invest in companies that are desirable on ethical grounds, directing capital to those companies that improve the environment, or provide medicine or breakthrough technology to the people who need it most.
Each of us will have a different interpretation as to what constitutes an ethical investment – just ask Steve Vizard. We invest to provide for our future – where you invest will play a part in building it.
For more information check out the Ethical Investing Association’s website: http://www.eia.org.au
Tread your own path!