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Ethical investment takes off

WHEN most people think of ethical investments, companies like Energy Developments and Pacific Hydro, which make “green” energy, usually spring to mind.

Stocks like News Corp and London Stock Exchange plc do not seem a logical fit, yet they meet the requirements of some ethical investment funds.

So what is an ethical investment? And how does it compare to a traditional investment?

The definition of ethical varies widely and as the number of managers offering ethical funds expands so does the variety. Investors are advised to carefully scrutinise the policies of each manager rather than simply rely on the label ‘ethical’.

Otherwise, they may find their money is invested in areas that do not meet their personal definition of ethical.

The latest entrant is AMP, which joins a handful of other firms including Australian Ethical, BBL, BNP Paribas, Hunter Hall, Tower and Westpac Investment Management.

All ethical managers apply a two stage process for selecting investments. First, they look for investments that will generate a good return. Second, and this is the tricky bit, they apply an ethical test.

In broad terms, there are two types of ethical test. Negative screening means that areas like tobacco, armaments, gambling, destruction of the environment and cruelty to animals are generally avoided. Positive screening allows investment in all industry sectors, but seeks out the best in each sector.

In most cases, the ethical test is loosely defined and each ethical investment manager has substantial discretion.

Australian Ethical is one of the few ethical investment managers that pro-actively supports activities such as recycling, conservation and energy efficiency. It applies both a negative and positive test and its current top 10 investments are shown in the table. They all have very clear ethical or ‘green’ credentials. Australian Ethical also provides loans and equity to various small enterprises, including eco-tourism ventures, a book collective, a community credit union and several Steiner schools.

Hunter Hall and Tower are examples of managers that apply a ‘negative screening process’. In Tower’s case, this policy allows it to invest in a cross-section of blue chip Australian stocks. In contrast, Hunter Hall has an eclectic collection of international stocks led by fashion house Donna Karan Inc and the London Stock Exchange plc (see illustration).

Westpac Investment Management applies a “positive screening process”. Its Eco Share Fund “invests in all industry sectors but gives preference to those companies with superior environmental performance within their sector”, Westpac states.

AMP’s approach is similar. It does not use a strict screening methodology, although it lists “areas of concern” including alcohol, gambling, armaments and animal testing.

It describes its approach as Socially Responsible Investment. It invests in the “leaders” in all main stockmarket sectors and targets “stocks that we think will benefit from the global desire to make economic growth more sustainable”.

All ethical investment managers take the view that businesses operating in a socially and environmentally responsible manner will deliver above average returns.

The returns achieved by ethical managers are varied, and any review needs to be treated with caution because only a small number of ethical managers have a long track record.

Australia’s two specialist ethical managers have a positive track record. Australian Ethical’s $60 million Australian equities trust has returned 16.4 per cent per annum over the past five years.

Its returns have consistently been in the top quartile and it has “consistently given excellent value for risk” compared to its peers, according to research group Morningstar.

Hunter Hall’s $152 million international equities trust has returned 29.8 per cent per annum over five years and has also achieved top quartile returns and “great value for risk taken compared to other non-ethical global equity funds”, Morningstar said.

Rashmi Mehrotra of research group van Eyk is more circumspect.

He has reviewed managers with an ethical fund and a non-ethical fund, and found that the non-ethical funds have generally achieved better returns.

n Mark Beyer can be contacted at mbeyer@vianet.net.au

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