Investors find that money can grow on trees
Australian Financial Review - SPECIAL REPORT - Your Super
Ethical funds are winning financial support as they show they can provide good returns, writes MiriamHechtman.
You may not be able to save a rainforest in the Amazon basin by investing your superannuation money, but atleast you can make sure you are not damaging it. And with all the recent fuss about climate change, funds which invest their money “ethically”, that is byavoiding companies that cut down rain forests or sell cigarettes, are set to become considerably more popular.
Even before the debate about climate change, the ethical investment or sustainable responsible investment(SRI) sector was making greater inroads in the main investment market. The recent Ethical Investment Association 2006 SRI benchmarking survey reveals that managed SRI portfolios grew by 56 per cent during the 2006 financial year from $7.67 billion to $11.98 billion, an increaseof $4.31 billion, compared with a growth of 15.5 per cent for mainstream portfolios.
“Human experience” is one of the contributing factors to the growth of SRI in Australia, says EIA executivedirector Louise O’Halloran. “People respond to issues which touch their lives. Many people have beentouched and angered by the activities at James Hardie because it is such a visceral example of corporate malfeasance. AWB is unraveling by the day, and we have seen a dramatic reduction in the company’s stockprice as a result.”
Says O’Halloran: “Another interesting feature emerging in SRI is the strong growth in green infrastructurefunds such as Babcock & Brown (from $100 million to $1.175 billion), Viridis Clean Energy Group (from$24 million to $111 million) and James Fielding (from $52 million to $110 million).
Australian Ethical Investment (AEI) executive director, James Thier, says “to a great extent, the increase [in ethical investment] can be attributed to a growing awareness that ethical investment exists”. He says that during the early 1990s, investigations by AEI showed that fewer than 10 per cent of respondents had heard of ethical investment. This was coupled with various misunderstandings including that investing ethically meant sacrificing returns. “Now there’s a heightened awareness of ethical investment in the broader population and there’s anunderstanding that it provides returns which are competitive with, and can surpass, conventional funds.”
Ethinvest’s general manager, Trevor Thomas, attributes the interest in SRI over the past 10 years to “the growing awareness of issues relating to climate change and environmental and social sustainability, combined with a private compulsory superannuation system that puts investment funds under people’scontrol”. Additionally, he says, the broad promotion of screened investment funds launched by large financialinstitutions has helped bring SRI into the mainstream. “It is no longer acceptable for most institutions to just say ‘trust us’,” says Thier. “People want to be shown and, even more, want it proven.”
He also notes the role that a younger generation will play in the growth ofthis sector because of their familiarity with environmental issues. “An increasing number of people are savvy enough to recognise that the actions of the companies which they support through their savings and superannuation have a great bearing on their ecological impact.”
Although there may be little correlation between sustainability and the success of a company in the short term, the medium to long−term effects will be beneficial, says Thomas. “We are convinced that companies that care for their staff, the ethics of their supply chain and their environmental footprint will be at acompetitive advantage in terms of lower reputation risk, direct costs savings through reduced waste and in recruiting and retaining staff.
“Water management and climate change are of significant interest. “Strong interest of late has been generatedby a media focus on Australia’s water shortages and on climate change,” says Thier, “especially generatedthrough interest in Al Gore’s An Inconvenient Truth. Uranium is also a key concern for investors. Says Thier: “With more than half of ethical funds investing in uranium shares through large holdings in BHP Billiton and Rio Tinto, there is a greater scrutiny of ethical fund portfolios by individuals to ensure they’re not supporting the uranium industry.”“Results from regular surveying of ethical investors shows that energy and resource efficiency, sustainablel and use and waste management are areas of strong support while militarism and armaments, tobacco and oldgrowth forest logging are the strongest areas of avoidance,” Thier says.
On a global scale, SRI funds under management in Australia represent 1.5 per cent of all funds undermanagement, compared with 2 per cent in the US and 3.5 per cent in Canada and the UK, though as O’Halloran points out, these other territories have been involved in SRI for much longer than Australia. “These figures reflect somewhat of a niche market, but all indicators point to a ‘mainstreaming’ of the investment style that SRI embraces. That’s because analysts are starting to realise that so much of acompany’s value is tied up in issues which are not reflected in the financials,” O’Halloran says.
Looking ahead, Thier warns that “deeper green” products should not be overlooked. “We need to be carefulthough that some of the ‘paler’ [green] options put forward, particularly from conventional fund managers who add an ethical or sustainable option to their product mix do not become, by default, the only onesperceived.
Fear factors
* People today want to put their money in companies sensitive to the environment.
* There has been strong interest in where the ethical funds invest the money.
* Of concern is that the cash does not go to the uranium, arms or tobacco industries.
