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Where to invest your money for maximum effect and security

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Across the country, environmentally aware people are recycling their waste, making local trips by push bike, and buying organic food. In many cases, however, their money may be supporting activities that are at odds with their personal values. While investment decisions are often made on purely financial grounds, there is a growing movement to align investments with personal ethics.

What is ethical investment?

The concept of taking an ethical stance towards investments (also known as Sustainable Responsible Investment, Socially Responsible Investment, or simply SRI) originated with the Quakers in the 18th century, and re-awoke in the early 1970’s to target US chemical companies that were manufacturing napalm for use in the Vietnam War.

From very modest beginnings, over the last couple of decades SRI has grown quickly both in Australia and overseas. Consumer options have proliferated, and from the perspective of business ethics, the Triple Bottom Line concept of giving equal importance to economic, environmental and social factors has achieved mainstream acceptance.

According to the World Business Council for Sustainable Development, applying sustainability criteria makes firms ‘more competitive, more resilient to shocks, nimbler in a fast-changing world, more unified in purpose, more likely to attract and hold customers and the best employees, and more at ease with regulators, banks, insurers, and financial markets’.

Die-hard perceptions that SRI investments are less profitable are proving to be incorrect. When AMP Capital Investors looked at the performance of Australian and American ethically screened funds up to March, 2006, these were found to have outperformed the market as a whole by a small but consistent margin over 1-, 2-, 3-, and 5-year periods. AMP’s results match many other findings dating back a couple of decades.

When selecting a viable SRI, consumers might ask themselves the essential question – what is an ethical investment and what is not? There are different shades of ‘ethical’ and it is worth critically examining the products on offer when shopping around.

Developments in Australia

Australia’s SRI industry peak body is the Ethical Investment Association (EIA.) In its 2006 Benchmarking Survey, the EIA found that by last June total finances in screened Australian managed funds had nearly hit the $12 billion mark. This represented a 56% increase from the previous year, and an impressive 36-fold jump over the preceding six years. The sector has now grown to take in 1.5% of all publicly available managed funds.

One company notable for its pioneering role is Australian Ethical Investment, which was established back in 1986. Over 20 years, it has grown from next to nothing to over $400 million worth of assets under management and a stock exchange listing. Along with another large fund called Hunter Hall Investment Management, it tends to be preferred by greener investors.

In a world first, the EIA launched an SRI certification mark in 2005 that it licenses to accredited companies and professionals within the industry. More recently, it has gone further by also putting together an online SRI training course for financial advisors.

SRI super opportunities

Since compulsory superannuation for Australian employees became law in 1992, the total amount tied up in super has blown out to $1 trillion. Unfortunately, many funds still fail to add ethics to their other selection criteria, and some are unwilling to provide a full list of their holdings.

The first Australian ethical super fund was created in 1993 by the Brisbane-based friendly society Australian Natives Association of Queensland (now Foresters ANA). Since then, dozens of others have followed suit in introducing various degrees of ethical screening. Today there are around a hundred SRI super funds, including offerings by eight of the twenty largest fund companies.

Options for would-be SRI investors expanded in 2005, when Super Choice legislation was introduced. Among other measures, this gives most employees the right to pick their own super fund while in employment. Workers who are ineligible to switch funds may still be able to roll their super into an SRI option offered by their employer’s fund alongside its main offering.

Through changes in employment, around five million Australians have been losing touch with some of their super. This can be a hurdle for former employees who would like to move it all into one single fund, thereby avoiding unnecessary fees. A government resource that may be helpful in tracking lost super is the Australian Taxation Office SuperSeeker service.

Community investing

Recent times have seen the arrival of Community Development Finance Institutions (CDFI’s) in the US, and to a lesser extent the UK. The intention of these bodies is to fill a gap by meeting the financial needs of underserved communities, and helping people climb out of poverty.

Australian SRI financial institutions with a focus on community projects include Foresters ANA (Brisbane) and the Bendigo Bank/Community Aid Abroad Ethical Investment Trust (Melbourne.) Foresters ANA is worth a special mention for the fact that it has been running continuously since 1890. A century later, in 1993, when the Australian Natives Association voted to merge with Manchester Unity, the Queensland branch chose to remain independent.

Along with similar institutions such as the Fitzroy and Carlton Community Credit Cooperative, Foresters sees itself as one of the few CDFI’s in Australia. It is one of the few SRI options that invests in people rather than companies and technologies. Most of its lendings are made within in the Brisbane area, and recent loans have supported housing cooperatives, womens’ groups, and refugee accommodation projects.

Credit unions go ethical

Victoria’s largest credit union calls itself mecu. Based in the Melbourne suburb of Kew, it took its present form in 2003 following mergers between numerous small credit unions over the decades.

From the start, mecu adopted a core set of environmental and social goals to guide its activities. It switched to an environmentally sound PVC-free credit card made from PETG plastic, and was the first credit union in the world to sign the United Nations Environment Program Finance Initiative. Environmental principles are applied to cash deposits, and it has pioneered a new approach to motor finance where greater vehicle efficiency is rewarded with a lower interest rate.

In South East Queensland, Maleny is a town well known for its numerous cooperatives. The Maleny Credit Union began life in 1984 as a grassroots enterprise, and over the years it has retained a similar set of values to mecu. Ethical screens are used for the investment of liquid funds, and in response to the unpopular Traveston Dam slated for the Sunshine Coast hinterland, it launched the ‘Dam Buster’ loan that offers a special low rate for water tank purchases.

Perhaps Australia’s other credit unions could be doing more to express ethical values through their lending activities.

SRI tackles climate change

Australia tops the carbon league table among developed countries, largely due to our energy-intensive resources sector. For the time being, the current mining boom is proving to be profitable for those involved. Over a longer timescale, the economic fallout from climate change may hit unsustainable companies the hardest, creating a ‘bust’ cycle. On economic grounds alone, this is a concern for institutional investors that tend to think in longer timeframes.

The Carbon Disclosure Project is a UK-based forum through which large investment funds have been successfully lobbying big business on the climate issue. Sending out thousands of letters soliciting emissions figures, it has borrowed from the best-of-sector model in ranking firms within several key industry classes according to ‘carbon exposure’. The Project has received endorsements from both German Chancellor Angela Merkel and former British leader Tony Blair.

With increasing climate concerns, some funds are turning more of their attention to renewable energy. Australian Ethical Investment is directing financial resources to several companies in this sector, including Babcock and Brown Wind Partners, SolarWorld, and Advanced Energy Systems.

Vice and virtue

An oddball child of the SRI movement is the Vice Fund, an ‘antisocially conscious’ US initiative that has responded to newfound ethical concerns by focusing on four core investment areas – tobacco, alcohol, defence and armaments, and gambling. Despite the risk from its lack of diversification, the Vice Fund has been enjoying better returns than both the stockmarket (S&P 500), and SRI indexes.

For those with a more holistic philosophical stance, there are interesting questions to consider about the future direction of SRI investing. Some people find it difficult to get excited because companies with unsustainable practices are becoming slightly more sustainable, and possibly these compromise-ridden shades of grey are influencing the debunkers who unfairly write off SRI as irrelevant.

However, SRI can come into its own when harnessed to tackle an important issue, one example being climate change. Another promising direction is community investment, which in uncertain times can provide a modest but secure return, insulated from the risk of stockmarket losses.

Martin Oliver is a writer and researcher based in Lismore (Northern NSW.) He is also an independent distributor for the Ecoflow range of fuel-saving units for cars and gas systems.

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