We can take that money we’ve put aside – “sleeping” money if you like – in the form of our retirement funds, superannuation or simply spare cash and invest in companies that fit with our ethical and green values. Or, at the very least, choose not invest in companies that appear to detract from them. This approach is broadly termed Responsible Investing.
Overview of Responsible Investing
A simple Google search for “ethical investment funds Australia” yields over 150,000 results, so you immediately know that there is an over-abundance of information available and working out where to start can be mind-boggling. This article will give you an understanding of the basic methodology and types of funds available.
Firstly a little primer on how the funds management industry works. Fund Managers set up a wide menu of funds each targeted to a different set of investors. Normally the prime criteria are based around different investors appetite for risk or capital gain versus regular income, the addition of ethical criteria adds another layer to the decision matrix.
Fund Managers basically adopt three approaches to establish their ethical and responsible criteria:
1. Negative Screening
The most common method of screening is known as Negative Screening, also known as Ethical Investing – now considered a subset of Responsible Investing. This is where the fund manager specifically excludes companies whose activities do not fit the ethical criteria of the fund. So for instance, let’s say the fund is a Green orientated fund, it would probably automatically screen out oil companies, coal miners, car makers etc, but it might still include alcohol makers such as Fosters, Rosemont etc. You would rarely find tobacco or gambling related companies in the portfolios of ethical funds. The companies that are left after this initial screening process, are then evaluated using standard financial investment criteria.
2. Positive Screening
The other relatively common method is positive screening where the fund manager seeks to find companies that actively promote the values or ethics of the particular fund. So for instance, a green energy fund would actively seek out opportunities in solar energy, wind farms and the like.
Of course some funds will apply both screening methodologies. Indeed one has to be careful here too, because in a recent report on Ethical funds in the UK it was found that a “green” fund run by the Swiss based Zurich, included companies like BP, because BP does have a solar and renewable energy division, albeit a tiny percentage of their activities.
3. Activist
Finally, and a relatively new approach in Australia, is what is known as the activist approach whereby the fund manager establishes a set of ethical criteria, and then uses these criteria to actively engage with companies via shareholder resolutions and other methods to change company behaviour. An example of the activist approach can be found in Australian Ethical Investments newly launched fund: The Climate Advocacy Fund. This is an “unfiltered” index share fund that will track the performance of Australia’s main share index, the S&P/ASX 200, which is basically the top 200 companies (by size) that are listed on the Australian Stock Market (ASX). This means that companies such as Fosters Group, Gunns Ltd and Macarthur Coal, which are almost always excluded from traditionally filtered indexes, are included. The fund then uses its rights as a shareholder to pressure the company into adopting more sustainable, or at least more transparent, operations that will make it more accountable. Time will tell if this approach is successful, but there are a number of successful precedents in Europe and USA, where this activist approach has had some positive results on the target companies.
Which fund to choose?
Choosing which fund to invest in, requires either a lot of research or the use of a financial advisor who is well versed in identifying your ethical priorities, financial needs and desires and matching them with the appropriate funds. This is no simple task, because, like a lot of products labelled green or sustainable, closer inspection often reveals that it's more marketing hype than reality.
Another way or course is to simply identify companies that fit your moral bias and invest directly. This is of course fraught with a myriad of issues and risks, so only head down this path if you have done your research — getting advice is always advisable.
I started this article on the premise that here is a way to achieve some of your sustainability goals while you sleep, but in order to do that you do need to do some work up front.
If you are new to investing, but want to pursue this it is definitely recommended that you start with a financial advisor specialising in this area. Some ethical investment companies that have a good reputation in the field are Green Equity Management, Ethical Investment, and Ethical Investment Services, to name just a few. There are many more. The author has not used any of these firms and so cannot recommend any in particular. Instead the best advice is to visit their respective web sites and call them to start you on the road to putting your money to good use, and building the wealth you need to survive and prosper — all while sleeping!
To find these and other other green investment advisors check out the Finance section of our Business Directory.
For more information on Responsible investing see:
Written by Gavan Farley
[Editor's Note: The views expressed in this article are entirely the author’s alone. This article was unsolicited and the author is not related whatsoever to any company mentioned.]
Image credit: jscreationzs / FreeDigitalPhotos.net
