Have you ever wondered about where your money is invested? What are the companies in your portfolio actually doing with your retirement savings, shares or indexed funds?
If you haven’t you might be surprised at the activities that your money is helping support.
In all likelihood, you’re invested in companies that profit from:
- Energy production from coal
- Old Growth Forest Logging
- And even less salubrious industries such as controversial weapons stocks, pornography, tabacco, uranium mining for nuclear energy, companies with poor human rights records
Does it matter? Well that depends. I would wager that most people would be ethically opposed to supporting some of these industries, given the misery that they create.
As a pretty committed greenie, I certainly am and this is why I want to put my money where my ethics are.
I want to create a positive future and see my money going to renewable energy projects rather than digging more coal out of the ground and burning it.
I’d prefer people with gambling addictions to have fewer opportunities to lose the shirt off their backs, than make money off them.
So, I’m going down the road of ethical investing. I want to be the change I want to see in the world and all that. If you don’t believe it’s possible as an individual investor than read on.
What is Ethical or Socially Responsible Investing?
When choosing companies to investment in, super funds and fund managers don’t usually take into labour standards and social, ethical or environmental considerations.
That’s where ethical or socially responsible investing comes in.
In ethical investing, companies and sectors are excluded from portfolios if they make or sell certain products.
Socially responsible investing involves screening out companies that conduct excluded activities, unless their commitment to social responsibility outweighs the negative aspects.
Sustainable investments are chosen based on how well a company manages environmental, social and corporate governance factors, not on what the company makes or sells.
Fund managers may either negatively screen meaning that they specially exclude companies or sectors and / or they may positively screen meaning they look for companies that do good.
The consensus is that socially responsible investing is not mutually exclusive with good returns. In fact quite the opposite is true. A Morgan Stanley Institute for Sustainable Investing study of more than 10,000 mutual funds reports that:
“Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is both on an absolute and risk-adjusted basis across asset classes and over time.”
But, it still gets a bad rap and not everyone agrees with taking the ethical route.
The Global Divestment Campaign
If you’re thinking this sounds like a good idea, then you’re in good company. Since around 2015, there has been a massive push in both Australia and globally to divest from fossil fuels.
The underlying reason is pretty straightforward – in order to keep climate change within 2 degrees Celsius, 80% of declared carbon stores in the stay in the ground.
Part of the reason why divestment makes sense is the financial case. If fossil fuels are to stay in the ground, they may become stranded assets and therefore worthless, leading to significant financial losses for the companies that own them.
What’s important is the motivation behind the divestment campaign. It’s not just about stranded assets or starving fossil fuels of cash. It’s about taking away the fossil fuel industries social licence to operate, much like what was done to big tobacco.
So far 749 institutions, controlling assets worth about US$4.85 trillion, have divested fully or partially from fossil fuels. The list includes institutions like the Rockefeller Brothers Fund, Yale University, World Council of Churches, Leonardo DiCaprio Foundation and the Norwegian Sovereign Wealth Fund.
Let’s also not forget the 58,000+ individuals divesting about $5.2 billion.
In Australia, many banks will no longer fund fossil fuel investments.
Index Funds Versus Managed Funds
There’s only really one retail index manager operating in Australia which is Vanguard Investments (surprise, surprise the low number of options). The cost of keeping your money with them is a whopping 0.14% per annum in the Vanguard Australian Shares Index Fund which tracks the SP / ASX 300 Index.
What you get is a stake in each of the 300 companies that make up the ASX3200 which means you get great diversification and a rate of return of the overall stock market performance.
Opt for a managed fund and you’re looking at higher fees, starting at around the 1.2% per annum mark. Unfortunately, predicting the ups and downs of the market is hard even for the pro’s and for that fee, your fund manager is unlikely to beat the market.
So you pay more for the management of your portfolio, without necessarily seeing a return.
But, if you’re wanting to put your money where your ethics are, it’s not so straightforward.
Who’s in the ASX 200?
The ASX 200 represents the top 200 companies trading in Australia. Companies are selected by a committee from Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX).
They are ranked by market capitalisation and to be eligible for inclusion in the index they must meet minimum volume and investment benchmarks.
All 11 sectors of the Global Industry Classification Standard are included and currently the sector breakdown looks like this:
An up to date list of which companies are there can be found here.
Generally, the ASX 200 is very carbon heavy, both in terms of direct investment in companies that produce carbon emissions and secondary investments (e.g the financial institutions that loan money for carbon projects).
Of course there’s also Woolworths, Tatts Group, Tabcorp and Crown Resorts (all gambling), Coca Cola (junk food), Origin, Santos, Woodside, Whitehaven (Energy) and Rio Tinto (mining).
Whether you have an issue with investing in any of the companies listed on the ASX 200 will depend entirely on your ethical standpoint.
Getting Started with Ethical Investing
One of the challenges with responsible investing is that there is no clear definition of what ‘sustainable’, ‘ethical’, or ‘socially responsible’ means. What you consider ethical may not be the same as me. That’s part of the challenge for fund managers.
And in fact, you might even be surprised to find that some funds include companies that engage in activities that aren’t considered ethical, as long as they don’t make up the majority of that company’s interest.
Another out clause may be the inclusion of certain industries that the fund doesn’t consider sustainable, but is still included as long as it doesn’t make up more than a certain percentage of the funds overall portfolio.
That’s why you find mining companies rounding out the top 10 of investments in some ethical funds.
The advice from Choice is to do your own due diligence and research the companies or funds you are considering investing in to ensure they match your ethics.
Responsible Investment Association Australia Search
To be included in this, the fund needs to convince the RIAA – an independent accreditation body – that their offering is ‘ethical’ in some way.
One of the main advantages I’ve found is that the information about the fund is comprehensive – you get full list of the companies that form part of the fund, their screening method and what specific things they’re screening out or in e.g logging or more sustainable companies.
Realistically most large funds offer an ethical option but the RIAA is a good place to start looking for funds when trying to avoid green washing.
So far, I’ve found 8 funds that fit the bill. But looking at the top 10 holdings of each, I was disappointed with the level of carbon exposure, which ruled out the newer index funds and narrowed my search down to 2 managed funds:
The problem for me is the fees. While Australian Ethical is outperforming the market – remembering that past performance is not an indication of future performance – the fees are 2.5%, the highest of any around.
Fees, Fees, Fees
I still remember the ads on the bus stops showing how much less Jenny would have in her Super compared to Mary because of the higher fees her fund charged. I’m a bit of a dork, I know!
Warren Buffett in his 2016 letter emphasised the advantages of low cost index funds. He said:
“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
So there is my dilemma, ethics versus my frugal tendencies.
Choose an ethical fund with high fees going against the greatest investor in the world or invest in companies whose business activities I don’t necessarily agree with.
Friends, what would you do? How do you balance your ethics with your desire to grow your wealth? Are you an ethical investor already? Where do you stand on ethical investing?
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Please note that this is personal research I have done for my situation. I am not a trained financial professional and you should seek advice for your personal situation. Please refer to my disclaimer.