Investors who invest ethically are helping their hip-pocket as well as the planet.
And it's catching on. What used to be on the fringes of investing is moving mainstream.
Australian share funds managed "responsibly" - those investing using environmental, social and government (ESG) factors - have beaten the average returns of mainstream share funds over one, three, five and 10 years.
It is no fluke limited to a single asset class. When compared with multi-sector growth funds – managed funds with tilts towards shares and property – the responsible investment versions also out performed over one, three, five and 10 years.
That may be surprising to some who think that investing ethically costs investors returns.
"You can invest with confidence, aligning your money with your morals, and it's not just a well-intentioned philanthropic approach, it is generating great returns for the savvy investors," says Responsible Investment Association of Australasia chief executive Simon O'Connor, whose organisation produced the comparisons.
Roxane Ingleton invests ethically because she wants to make a difference.
She switched her super from an industry super fund to a retail fund, Future Super, that does not invest in fossil fuels, because she doesn't want her money going to "big, dirty energy companies".
Future Super was founded by Simon Sheikh, the former national director of GetUp.
"While some super funds are not investing in coal mining companies, they are [still] investing in the banks who provide finance to them," says the 34-year-old midwife from Melbourne.
Roxane, who is politically active - she is standing as the Greens candidate for the Deputy Lord Mayor of Melbourne - no longer does her banking with one of the big four, but has shifted her accounts to a community bank.
She says the big four banks are huge financiers of fossil fuel projects, yet they, along with BHP and Rio Tinto are often included in super funds' "socially responsible investment" portfolios.
Moveable feast
What is "ethical" is in the eye of the investor. For some, it is mostly about the environment and climate change. For others, the concerns may be with tobacco gambling or pornography.
For others, it is all of these issues and more.
Anyone who is serious about investing ethically has to do their homework to find out exactly how a superannuation fund or ethical managed fund is managing the money.
Many types of screening are used. Some super funds and managed funds don't invest in companies that derive revenue from fossil fuels, for example.
Others will use a negative screen but also invest in companies involved in renewable energy, for example.
Some take what can only be called an "ethical-lite" approach. They invest in companies deemed to be best in their category or sector. That could mean investing in one the big miners, for example, because it scores better than its peers on ESG measures.
Super is key
Superannuation is the starting point for ethical investing because most people have super.
More than half of Australia's largest-50 super funds offer responsible investment options, but they have only a small amount of money in them.
That is probably more a result of the general apathy that most people have to their super rather than them being uninterested in investing ethically.
The vast majority of super fund members are with their funds' default investment option.
Trustees of super funds have a duty to maximise investment returns for their members.
And trustees are increasingly interpreting that duty as meaning that they need to mitigate the risk that a coal miner, for example, could end-up as a "stranded asset" as the world moves towards renewable sources of energy.
More super funds are incorporating ESG principles into every investment decision because companies that score well on these measures tend to have better financial performances.
Climate Institute chief executive John Connor says the "main game" for him is to have super funds investing ethically across their whole portfolios rather than just providing these "little parking bays" – referring to the super funds' ethical options.
Vision Super chief executive Stephen Rowe says his fund has been investing responsibly for over a decade now and has been "ramping up its" efforts in the past few years.
"We are factoring in environmental, social and governance factors in investing across all portfolios," Rowe says.
The fund adheres to the United Nations Principles for Responsible Investment and signed-up to the goal of the Paris Convention on Climate Change in 2015 to keep global warning below 2 degrees.
The fund uses index managers, those that track the returns of the various investment markets as well as "active" managers, those who pick shares with the aim of outperforming markets.
"We have reduced our exposure to carbon internationally by 70 per cent for our index investment and some 17 per cent less domestically than the index," Rowe says.
The fund has also "terminated" a couple of active managers because of their high exposure to carbon in their portfolios.
It's not simply a question of divesting, Rowe says.
"Some 80 per cent of energy in Australian is still produced from carbon," he says.
"In addition to some divestment, we also engage with the banks and with gas companies like AGL and with coal companies to try to influence them and promote the idea that renewable is the way to go," he says.
The fund also votes all of its shares in resolutions put at companies' annual general meetings.
Planner's tips
There is an array of names that confront those interested in investing ethically. They go by the names of ethical, sustainable, socially responsible, socially responsive and eco, among others.
But what counts is how the money is invested, not simply the name that is given to the fund for marketing purposes, says Mike Josephson, a financial planner with Ethical Investment Services in Kew in Melbourne.
"You want to see what the screening process is and want to see what is in the portfolio," he says.
Josephson is originally from the United States where he advised not-for-profit organisations on how to invest ethically.
He finds it frustrating that compared with the United States there is generally much less disclosure of investment holdings in Australia among both super funds and managed funds.
It was planned that super funds would have been required to disclose their portfolio holding from the middle of this year, but the start date has been pushed back by the Australian Securities and Investments Commission to the middle of next year.
The Ethics Centre executive director Simon Longstaff says that most people probably have a degree of trust that there is some kind of thought being given by their super fund to where the investments are being made.
"If markets are supposed to be free then every participant is supposed to be able to make informed decisions about that they do and the only way you can do that is if you have the relevant information before you," Longstaff says.
Josephson says sometimes the ethical goals of his clients can be better achieved by investing in shares directly.
That is particularly with those with self managed super funds who like to invest directly rather than using investment managers. Many large super funds now allow fund members to invest directly in Australian shares.
He says there are plenty of companies listed on the Australian sharemarket that are good fits for those who want to invest ethically.
These include Australia's healthcare and medical technology and healthy foods sectors that have many companies that are successfully growing overseas. Examples include CSL, Cochlear, Blackmores, and Freedom Foods.
Josephson is also a board member of the Responsible Investment Association Australasia, which runs a certification program for super funds and managed funds and provides summaries of how they invest and links to their portfolio holdings, where available.
Its website is a good starting point for anyone interested in ethical investment.
Deepest green
Stuart Palmer, the head of ethics research at Australian Ethical Investments, says the attitudes of the wealth manager's investors have changed over time.
When Australian Ethical started in 1986 it was very much about the environment, but now investors have a broader range of interests, he says.
"At the end of the day, we do think the overwhelming majority of people try to do the right thing by people, animals and the planet," Palmer says.
"Where they differ may be around where those things are balanced or the best way of advancing the interests of people, and animals and the planet.
"Having said that, people do quite often have a particular passion and that is where we have robust discussions with members about ways we have drawn the balance," Palmer says.
Australian Ethical will not invest in companies with material interests in gambling, tobacco and fossil fuels, among other activities.
It also invests in companies making a positive contribution, such as in the healthcare and renewable energy sectors.
It invests in Westpac because it is a "sustainability leader", but not in the other three big banks.
It does not invest in Wesfarmers, the owner of Coles, because Wesfarmers has significant interests in coal.
Nor does it invest in Woolworths because it owns poker machines and alcohol retailers.
Australian Ethical's screening processes mean its various investment portfolios tend to have bigger tilts to smaller companies than mainstream portfolios.
Some of these smaller companies have done very well.
For example, Australian Ethical bought shares in Nordex SE, a German company that makes wind turbines in 2013 at just under $4 a share and the shares are now worth $24.
It also owns shares in Applied Materials, a US company that makes equipment and software for the manufacture of photo-voltaic cells, semiconductors and LCD displays. The shares were bought in 2013 for $14.60 and are now worth $24.
Julien Vincent, lead campaigner at Market Forces, which is an affiliate of Friends of the Earth, says some super funds are doing much better than others when it comes to fossil fuels. However, they are generally not doing enough to respond to climate change in a way that reflects the gravity of the issue, he says.
Vincent says more than 5000 people have used super switch to call for disclosure of fossil fuel divestment from their existing fund or to switch to a fund with less exposure to fossil fuel investment. Many more have looked-up their funds' exposure to fossil fuels since the inception of Superswitch 18 months ago.
Key strategies explained
Broad Responsible Investment – applies environmental, social and governance screening to all investments. This approach rests on the belief that these factors are a core driver of investment returns.
Negative screening – excludes specific industries, sectors, and companies that do not align with the responsible investment goals. Common criteria used in negative screening include fossil fuels, gaming, alcohol, tobacco, weapons, pornography and animal testing.
Positive screening – involves investments that relate to sustainability themes. This involves making investments such as, but not limited to, clean energy, green technology, sustainable agriculture and forestry, green property and water technology.
Impact investing – targeted investments aimed at addressing social or environmental issues while also creating positive financial returns for investors. It includes investing in projects with social purposes such as financing initiatives that address environmental issues.
Source: Edited extract from the RIAA's Responsible Investment Benchmark Report 2016.
