TRUSTEES of superannuation funds need to tread very carefully if they offer an ethical or socially responsible investment option, the University of Melbourne’s Centre for Corporate Law and Securities Regulation has warned.
The centre said ethical funds and investment strategies were characterised by a dual objective.
They take into account both the financial performance (ie the risk/return profile) of the investment and the social, ethical or environmental ‘performance’ or track-record of the underlying company.
Trustees and other investment fiduciaries cannot, as a general rule, prioritise non-financial objectives, such as social or ethical objectives, over the financial objective of optimising the return on the fund assets.
However, the pursuit of non-financial objectives is not, of itself, inimical to the financial objective, the centre said.
“It is possible for fund assets to be legitimately deployed with the aim of improving labour or environmental standards, human rights or animal welfare provided that, in the pursuit of those goals, the financial objective is not disregarded or subordinated to the non-financial goals,” the centre said.
“On this basis, a fiduciary that sacrifices an adequate rate of return on the fund assets or places the fund assets in jeopardy, in the pursuit of a non-financial objective, is at risk of being in breach of the prudent investor rule”.
The centre also asked whether a trustee who avoided alcohol companies and therefore sacrificed investment returns (see main article) would breach the prudent investor rule.
“It is unlikely that an Australian court would consider such a fiduciary to be in breach of its duty where the decision to invest was made after due consideration of the performance characteristics of the relevant securities, and the impact of their exclusion on the risk/return profile of the portfolio,” it said.
Moreover, given the nature of the screening techniques employed by (most) Australian SRI funds, returns from those funds may be correlated to the broad market.
