Are you a responsible investor?
Responsible and ethical investing means many things to many people. But the foundations are essentially the same. Investors look for companies that are socially responsible apart from delivering good financial results. They make a conscious choice and exclude companies involved in fossil fuels, gambling ,alcohol and tobacco to name a few. Companies that place importance on human rights, effective labour practices , protection against animal testing etc gain preference in the lens of a responsible investor. This is where the distinction becomes difficult, what is unethical to some investors is considered a good investible business for certain other investors.
With terms like ESG ( Environment, Social and Governance), sustainable, ethical and responsible being floated around it is hard to determine a single filter to create such a portfolio. Some investors use the framework provided by the Global Reporting Initiative(GRI) or the Sustainability Accounting Standards Board(SASB). These tools provide a standardized approach to assess a company’s performance across ESG issues, climate change, biodiversity and more. The Dow Jones Sustainability Index of the FTSE4Good Index also assess companies based on a range of ESG criteria.
In PwC’s Global Investor Survey 2022, they learnt that investors gave higher importance to innovation and financial performance. Reduction of greenhouse gas emissions is considered a lower priority. They wanted companies to be transparent about the cost of meeting sustainability commitments(including climate goals). Around 87%( around 197 of the investors/analysts that took part in the survey) believe that corporate reporting contains greenwashing. What do they mean by that ? Essentially it means that it is more of a Public Relation exercise without actually having the proof to substantiate the claim.
Responsible, ethical and sustainable investing are all essentially the same as they factor in the impact on society and the environment as well as good financial results.
What is greenwashing ?
For a formal definition of greenwashing , Investopedia says it’s the act of providing investors misleading or deceptive information about the impact of the company’s operations and products on the environment. To read more go here.
The recent highlight has been on super funds claiming they are sustainable and ethical whilst investing in companies that were involved in fossil fuels. Mercer Super is the first super fund to be sued by ASIC for greenwashing. The charge is that they misled their members about their sustainable fund option whilst heavily investing in stocks like BHP, AGL Energy Glencore etc. They also claimed to have excluded alcohol and gambling institutions whilst investing in Crown Resorts, Tabcorp, Budweiser, Heineken and Carlsberg.
And more recently many of the large super funds have taken down their climate target goals and claims about sustainability. After the spotlight on Mercer, legal and marketing teams have been working overtime to take down untrue claims from their websites. This is not a harmless marketing spiel that will not affect anyone. Members are investing their future retirement funds ( for most Australians this is the bulk of their funds) into options that matter to them only to realise they have been deceived.
Are there any ethical super funds?
Many super funds have ethical investing options which means other members can invest in fossil fuel companies, however the option you choose like Sustainable Plus, Ethical etc will screen out certain companies. Australian Ethical Super is the only super fund that has an “Ethical Charter” and all the investments they make have to meet the criteria laid out in the Charter. They are also aligned to all 17 of the SDG (Sustainable Development Goals) goals set out by the United Nations. They focus on sectors like Information Technology, Health Care, Communication, Utilities and Real Estate. Whilst totally avoiding energy and mining and have a reduced focus on consumer discretionary and staples.
The next question that comes to mind is ,what about performance? In the initial years, sustainable companies do find it difficult to deliver the same performance that other companies can achieve. However as the years progress, these companies tend to get better interest rates and terms from banks and lending institutions, recognition from society for their efforts, possible tax benefits etc. So though it will cost more in the initial years ,the hope is that payoff will be there in the later years.
How are our companies faring?
Australia has an ambitious target of net zero by 2050.Governments all over the world are looking at increasing taxes for companies that don’t adhere to climate change goals. This forces companies to change their ways and prioritize sustainable and environmental goals. Companies like Bunnings, Kmart, Linfox and Super Retail Group are hoping to achieve net zero carbon emissions by 2030. They are on the hunt for warehouses that provide climate efficient sustainability ratings. Few others like Amazon, Metcash and Australian Pharmaceutical Industries hope to reach this goal by 2040.
These companies are ahead of the game and not waiting for mandatory government regulations. Similarly large property groups like Goodman, Charter Hall, Dexus, GPT etc are ensuring that their buildings are energy efficient and installing solar panels on a widespread basis so that they can efficiently transition to a higher usage of renewable energy. This puts them in a better position with regards to the government’s renewable energy program –GreenPower.
Our large super funds have not been able to lobby successfully with these energy and mining giants to reduce their carbon emissions. They claim there is a lack of engagement from these big polluters. However the way they have voted on climate acknowledgement is another story altogether. The 3.4 trillion dollar industry of superannuation has a seat at the table and if they want to avoid lawsuits and accusations of greenwashing they have to get their act together. They can’t say one thing and do the opposite.
What are the available ethical investment options for retail investors ?
So what options do you have if you want to invest some funds other than super into these sustainable and ethical options. Vanguard has an option – Vanguard Ethically Conscious Australian Shares ETF (VETH). Amongst the top 10 holdings are the big banks, Telstra and Transurban. Also in the list is Fortescue Metals. So they don’t entirely eliminate GHG (Greenhouse Gases) offenders but have some sort of filter where the companies who are taking active steps are included in the portfolio. The management fees are 0.16%. They are certified by the RIAA.
Betashares has a fund called Betashares Australian Sustainability Leaders ETF (FAIR). This fund does not invest in the big banks or mining companies. The top ten holdings in this ETF include Telstra, Goodman Group, CSL ,Suncorp and ASX to name a few. The management fees are 0.39%. They are also certified by the RIAA.
Comparing the two funds we can see how these two institutions have a different view on sustainability and ethics. However if they are clear in the description and transparent with their objectives they cannot be accused of being dishonest or greenwashing.
Which way to go?
It’s a vast playing field and to do the research to invest in ethical and sustainable companies is quite hard. There are more investment options than five years ago. It does boil down to your personal values and beliefs. Using these organisations and institutions as a starting point equip yourself with knowledge and determine which objectives matter to you.
We are in a period of transition and companies who put their hand up are being rewarded by shareholders and important stakeholders. Governments want these companies to enable them to achieve their climate and sustainability goals. At the local level we can see the increase in the use of solar panels and conscious recycling efforts by many residents. There is no doubt we all have a part to play in ensuring that the world is a safer place and minority communities are not exploited.