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Analysis - Socially Responsible Investing Grows In Australia

12 November, 2004

Asia Pulse

Investing with an ethical fund can leave you feeling all warm and fuzzy but will it also leave you with a fatter wallet?

Ethical, or socially responsible investing (SRI) is a relatively new phenomenon in Australia - it's only 15 years since the first public SRI fund was established here.

There are about 25 fund managers operating on ethical guidelines - which means they look at a company's record on the environment and corporate governance, as well as its financials before putting money into the stock.

It's a comparatively tiny industry - just A$3.3 billion (US$2.52 billion) was invested with SRI managed funds in Australia at June 30 this year, according to the 2004 Ethical Investment Association Benchmarking Survey.

By comparison, figures from Assirt Research show there was about $483 billion sitting in retail and wholesale funds in total at the same time.

Many investors will simply never think of ethical investing, while others will be frightened off by one of the myths surrounding SRI - that it might make you feel good but won't make you as much money.

The truth is some of the country's best performing funds in recent years have been ones operating on SRI guidelines.

A comparison by Ethical Investor Magazine of ethical to mainstream fund returns for the year to June 30, 2004, found average ethical fund returns, after management fees, outperformed both average mainstream wholesale and retail funds on a one, three and five year time scale.

And at investment giant AMP its Sustainable Future Australian Share Fund ranks as one of its two top performers at present, with a total return in the year to October 31, 2004, of 23.2 per cent.

Within the ethical investment industry there's a broad range of approaches and methodologies - running from the the "light green" end of the spectrum, where funds might avoid alcohol, tobacco and gaming stocks to the "deep green" end, where no company with involvement in a business considered unsustainable, or with a questionable environmental, social or corporate governance record will be touched.

AMP's head of sustainable funds, Michael Anderson, said the Sustainable Future fund was "one of the greener funds" operating in Australia. "We are probably not the most extreme and the reason is that there does come a point where you are adding fairly substantial risk and we've tried to put together a product for the average mum and dad to put their super into," he said.

Ian Woods, senior research analyst for AMP Capital Investors, said weapons and uranium mining were not touched, but neither were companies with dealings in alcohol, gambling and tobacco.

"We look at the social costs and benefits associated with these industries - whether it be health costs, social costs - intangible or direct - and we see at the moment a lot of those costs are extraneous," he said. "In the future those sectors are going to be squeezed by the fact that they do have those extraneous costs." Using James Hardie Industries NV and its asbestos-related liabilities as an example, Dr Woods said the decision to invest in a stock or not could be called a moral one or wise management.

"You can imagine the difficulties James Hardie is going to have attracting new and good employees - that's going to be a business cost to them," he said.

"We can analyse it either way - as a moral assessment or financial but you come to the same point."

Mr Anderson said there were five teams managing active equity funds at AMP and the Sustainable fund was one of the top performers.

"Research has shown that SRI funds have not performed worse (than mainstream funds) and may have performed better," he said.

Mr Anderson believes the success of the SRI model comes from looking at more dimensions of a company than a typical mainstream analyst.

"We look at how the company deals with their staff, with occupational health and safety, corporate governance and environmental issues," he said.

"We find that the companies that are better on all of these tend to be better companies."

Australian Ethical Investments Ltd (AEI) is one of Australia's "deep green" SRI managers.

AEI executive director James Thier said the group follows a set of guidelines based on the principle that when investing "you don't leave your principles or morals at the door".

"It's really just this belief that you want to know what your money is doing, " he said.

"We have a broad principle which says we want to avoid areas that are considered to unnecessarily extract, create, produce, manufacture or market materials, products, goods and services which will have a harmful effect on humans, non-human animals or the environment.

"So that's a broad concept and we would then implement that by saying we don't invest in uranium mining or tobacco production or alcohol production and those sort of things."

AEI uses a "positive screening" process - which means supporting companies for doing the right thing rather than the "negative screening" approach of ruling out companies because of certain activities.

However, there are always "sin" companies which are highly unlikely to ever find favour.

"If you want an example of how that translates we don't invest in uranium mining or native forest logging, tobacco production or alcohol, armaments or repressive regimes (and) we're very careful at the moment on genetically modified foods," Mr Thier said.

He was aware of perceptions among investors that embracing ethical investing means sacrificing star stocks - the SRI-focused punter would not have shared, for example, in the near-300 per cent share price gain made by poker machine maker Aristocrat in the past year.

But, he points out, they would have been in on the 80 per cent gain in Blackmores and others.

"I don't think anybody would ever believe that they could ever be in all the best companies but we don't believe there is anything inherent in being ethically sound which is going to detrimentally affect your returns," he said.

"You might miss out on some of the stars but you might find other stars instead."

Ethical investing isn't, of course, for everyone. Robert Tomasello, principal of financial planners iAdvise, based in the Sydney suburb of Strathfield, said he would be unlikely to mention SRI unless a client first specified an interest in the area - and in about 17 years of practice he's had just three clients who did so.

"We don't generally bring it up because if it's not a concern to them, why worry with an added layer of something to think about," he said.

"Quite honestly we don't think there's a distinct advantage in performance."

But Michael Walsh, the executive director of the Lifecraft Group, which produces the specialist Ethical Investor Magazine and operates SRI research house Corporate Monitor, believes interest in SRI will grow along with broader changes in society.

"We are seeing privatisation of social investment and the energy sector becoming more green, so the fact is the economy is moving towards a more sustainable model," he said.

"And if big business doesn't respond, these (sustainable-focused) companies will come up anyway."