It can be argued that ethical investing dates back to at least 1758 when the Quakers ruled out investing in the slave trade. While there have been ethical screening funds around for more than two decades, socially responsible or sustainable funds have only been around for the last 10 years.

In the earlier years of ethical investing, the criticism was that by actively eliminating some key profitable industries, such as alcohol and tobacco, the returns would be lower and the funds would not be as diversified. While this was true in the earlier years it is not the case now. Socially Responsible Investment (SRI) funds can and often do outperform funds which have these sectors included.

Further evidence that SRI investing does not penalise returns is given in Morningstar’s November 2016 report “Sustainable Investing Research Suggests No Performance Penalty”.

 

WHAT ARE ETHICAL INVESTMENTS?

Investors often ask about how they can align their investment decisions with their views on sustainable development and environmental concerns. Of course, this is a fantastic option for socially and environmentally conscious investors. It means that your money can be actively used, as the United Nations puts it, to: “meet the needs of the present without compromising the ability of future generations to meet their own needs”.

The challenge for SRI is how to adopt a sustainable approach with transparent reporting on the metrics that are important, without compromising sound investment principles.

 

FACTS AROUND SRI INVESTMENTS

The Global Investment Review 2020 reported that sustainable investments reached US$35.5 trillion in assets under management. This represents 36% of all professionally managed funds. In Australia around 40% of the market is invested in SRI funds.

Each year the Responsible Investment Association Australasia reports on the SRI sector. The key findings from the 2021 report are:

    • SRI funds in Australia make up 40% of the total investable funds in 2020, up from 31% in 2019. The SRI sector grew 15 times the rate of the entire investment market.
    • The top three responsible investment approaches for ESG (Environmental, Social, Governance) integration are negative screening, corporate engagement and shareholder action.
    • Investment managers are improving accountabilities by better evidencing their claims.
    • The exclusion of the fossil fuel sector is important both to the public and fund managers. However the report found negative screening approaches and the expectations of investors do not always align.
    • Despite economic set-backs experienced by Covid-19 lockdowns, SRI funds outperformed both international share and multi-sector growth funds in 2020. With an increasing number of fund managers including an SRI approach the differential in fund performance is expected to become smaller

More information and an executive summary of the 2021 RIAA report is available in this link RIAA’s Responsible Investment Benchmark 2021 report

 

LYFORDS APPROACH TO SOCIALLY RESPONSIBLE INVESTING

The SRI portfolios that Lyfords recommends within a QROPS structure are designed to address the issues most important to environmentally focused investors without compromising on sound investment principles. They do not require investors to accept lower returns.

Ethical investing is like peeling the layers of an onion. On the outside layer of the onion, investments have been filtered out for companies that have exposure to pornography, cluster bombs, land mines and nuclear weapons. The next filter or layer may filter out companies invested in alcohol and tobacco. Going down to the inner core of the onion analogy is where companies are giving back and cleaning up the environment.

There are a number of different approaches to ethical investing, such as ‘negative’ or ‘positive’ screening. Negative screening seeks to exclude certain companies or industries assessed as having a negative impact on society. This includes  industries with exposure to factory farming, child labour, cluster munitions and landmines, nuclear weapons systems, tobacco, alcohol, gambling and adult entertainment.  Generally, companies connected with these issues can be excluded without a significant impact on diversification.

‘Positive screening’ is where fund managers will weight portfolios to companies that support, for example, fair-trade agreements, focus on environmentally sustainable practices, or do volunteer work in the community.

An SRI fund needs to also include a focus on shareholder advocacy. It needs to consider whether a company is acting responsibly on a range of environmental, social or governance issues including emissions metrics. This includes both greenhouse gas emissions intensity and potential emissions from oil, coal and gas reserves.

Lyfords believes Socially Responsible Investments are an important option to have. Ethical Investments can also be referred to as SRI, but Lyfords believes that there is an important distinction between the two. SRI funds also consider investments in companies from both a financial and a social benefit perspective. SRI funds are sometimes referred to as ESG (Environmental Social Governance) funds.

The strategy chosen in the SRI funds that Lyfords recommends for QROPS portfolios are aimed at pursuing higher expected returns through increased weightings to securities with smaller market capitalisations, lower relative prices, and higher profitability.

Ethical Investments QROPS funds

This two year old polar bear was with its mother when photographed on the pack ice south of Franz Josef Land, 18th June 2017, Latitude 78′ 29″ from the Russian nuclear icebreaker ’50 Let Pobedy’ (50 Years of Victory).
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