Busting some myths on responsible investing
Last month, close to 300,000 Australians gathered at climate change rallies around the country in one of the largest protest events in the nation’s history. Millions turned out in similar rallies in 150 countries around the world. Many of the attendees were school students, sometimes as young as 8 years old, who held signs with slogans such as “School Strike for Climate Action” and “If you did your job, we would be in school!”. In addition, more than 2,500 Australian businesses took part, either closing their doors or allowing employees to attend the rallies.
Today’s protesters will be tomorrow’s teachers, politicians and CEOs. Not only will they vote on government policies, or the way companies conduct business, they will also choose to invest their hard-earned dollars in companies that are socially responsible. The Responsible Investment Association of Australia (RIAA) estimates there is more than $2.96 trillion AUD invested in ethical strategies around the globe.
Busting some myths
Responsible investing was considered niche less than two decades ago, but given the recent figures this can no longer be said to the case. That said, while there has been rapid growth in responsible investing globally, there are still a few myths around investing responsibly that persist. I thought I’d bust some of them:
“All ethical funds are the same”
Everyone’s definition of ethical is slightly different and, and the same is true when it comes to different fund managers. For example, some ‘ethical’ funds invest in mining companies that run coal mines, or companies involved in the sale of tobacco and alcohol, or involved in gaming.
As a result, thorough due diligence is required to ensure the responsible investment fund you are choosing is indeed ‘true to label’. One of the best ways to do this is simply to look at the underlying investments (if you can!) and see if any of the holdings are not in line with your principles and underlying ethical values.Helpfully, the RIAA runs a ‘Responsible Investment Certification Program’ which aims to help investors navigate these complexities. According to the RIAA, if an investment product has been certified by the RIAA, it means the product has implemented a detailed responsible investment process for all investment decisions, clearly discloses what that process is, has been audited by an external party to verify the investment process, and has met the strict disclosure requirements of the program.
“You can’t generate outperformance”
One of the biggest misconceptions is that investing responsibly comes at the cost of financial underperformance. To illustrate, the RIAA1 found that responsible investment Australian share funds surveyed outperformed mainstream Australian share funds, on average, over the 5 and 10 year periods to 31 December 2018 .
A study by Axioma2 suggests companies with better ESG credentials are better performers, based on the idea that issues such as bad governance or environmental problems damage profitability.
Of course, it’s important to keep in mind that past performance discussed in this blog isn’t necessarily indicative of future performance and investments can go down, as well as up. There is no assurance that investments based on ethical considerations will outperform investments based on other considerations.
“You can’t invest responsibly and have a well-diversified portfolio”
In Australia there are ETFs and unlisted managed funds that both invest responsibly and provide diversified exposure to domestic or global equities, and even to emerging markets. It’s entirely possible to have a diversified and responsible portfolio.
“Only millennials are interested in responsible investing”
No doubt millennials lead the way in terms of demand – but the interest in responsible investing spans all age and demographic groups. This includes not for profits, religious groups, high net worth investors, family offices, and charities who actively are seeking out ‘dark green’3 investment choices.
“Ethical investing is only about protecting the planet”
Responsible investing usually covers ‘ESG’ which stands for ’Environment, Social and Governance’:
- Environmental criteria may include a company’s energy use, pollution, waste, natural resource conservation and treatment of animals. It may also be used in evaluating any environmental risk a company might face and how it manages that those risks.
- Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates.
- Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights
BetaShares’ Responsible Investment Funds
BetaShares offers two funds certified by the RIAA as ‘Certified Ethical Investments’4. Both funds also recently received ratings of 4.5 out of 5 in 2019 from the Ethical Advisers Co-op5, which was the highest rating by any investment fund (though ratings are only one factor to be considered in deciding whether to invest in a financial product):
- Global Sustainability Leaders ETF (ASX Code: ETHI)
- Australian Sustainability Leaders ETF (ASX Code: FAIR)
Both ETHI and FAIR can be considered ‘Dark Green’ and employ some of the most stringent ESG screens in the industry. Companies are screened to exclude those with significant exposure to the fossil fuel industry, as well as those engaged in activities/products deemed inconsistent with responsible investment considerations, including gambling, tobacco, armaments, uranium/nuclear energy, destruction of valuable environments, animal cruelty, mandatory detention of asylum seekers, alcohol, and pornography.
And both funds have done their bit (so far at least) to help bust the “performance myth”, having outperformed comparable non-responsible investment benchmarks (i.e. the MSCI World Index for ETHI and the S&P/ASX 200 Index for FAIR) since their inception to end September 2019.
 Source: Responsible Investment Benchmark Report 2019 Australia (RIAA). Past performance is not an indicator of future performance.
 Financial Times, Companies with strong ESG scores outperform, study finds, www.ft.com
 Ethical investments may be described in different shades of green such as light and dark. A dark green fund will have a very strict approach, avoiding any company or industry that does not meet its ethical criteria, which makes it attractive for people with strong convictions about corporate activities they oppose.
 The Responsible Investment Certification Program does not constitute financial product advice. RIAA does not recommend to any person that any financial product is a suitable investment or that returns are guaranteed. Appropriate professional advice should be sought prior to making an investment decision. RIAA does not hold an Australian Financial Services Licence. www.responsibleinvestment.org.
 Source: http://www.ethicaladviserscoop.org/. The rating only considers the ethics of a fund.