Sceptical About Investing Ethically?

Think that investing in ethical companies won’t make a difference, is a thing of the future, or a bit airy fairy? If you’re a sceptic or want some clarity on investing in responsible entities, please read on. 

As discussed in our earlier article, what constitutes an ethical investment is often open for hot debate.  In short, everyone will have their own views about what ethical/sustainable means to them.

We have been researching companies to create a list of go-to ESG (ethical, social and governance – 3 key criteria) investments, should an investor choose to add an element of environmentally conscious and/or sustainable holdings to their portfolio. In doing so, a lot of questions have arisen between Scott Keeley, our senior adviser, and myself.  Scott could be considered a sceptic, and is always quizzing me on how ESG investment can work for our clients.  Talking to Scott about a lot of things is like banging my head against a brick wall, however I’ve always enjoyed our passionate debate on this topic.

SK:  I’ve had one bad experience investing in renewables (solar and windfarm companies) for a client about 10 years ago.  He invested $10,000 across 5 different companies, they’ve all gone broke.  Can I be sure that won’t happen again?

ET: As with any investment there is risk involved in choosing to invest in renewable energy. A long term approach is necessary when investing in the market, as you’ve always told me.  All emerging companies have the potential to go broke, ethical or otherwise. It is advisable to invest in better known shareholdings to ensure a track record of performance that may give confidence of a continuation of business.

It may take time, but there are some success stories! The graph below shows a comparison of Infigen Energy (one of Australia’s largest renewable energy producers – predominantly windfarms) and Origin Energy. While at any point, one is performing better than the other, what is most important is that the trends are similar. This is no way assures us of the future but does give an indication that alternative energy options have many supporters.

Chart 1:  Infigen Energy (blue) and Origin Energy (red).  This chart is for comparative purposes only, and not a recommendation on either holding.

SK:  Surely what I think is ethical will differ from what you think is ethical?  How can you cater for that in building an investment portfolio?

ET:  Pay attention Scott, I’ve already written an article about this! This is absolutely true! There are many factors that investors will consider in determining how they wish to invest their funds and what they wish to avoid.  In discussing an ESG portfolio, your individual preferences will be identified and we will endeavor to create a portfolio that is right for you. There are ethical investments in all asset classes that your portfolio can be diversified across and therefore an entirely ethical portfolio can be created.

SK:  I think I understand what ethical investing means.  What does ‘sustainable’ mean in investing terms? 

ET:  Sustainable investing aims to support companies that actively fight climate change, environmental desolation and choose to increase their corporate responsibility. This means that while certain companies may not be ethical (think oil production, tobacco distributors) they may be investing in programs or initiatives to offset their activities to better the environment and human rights.

SK:  Okay, that makes sense.  It’s why some companies I would not consider ethical pop up in ethical superannuation funds!  Broadly though, I don’t have the skills or the time to run my own filters over every company.  Is there an easy way of accessing these types of investments?

ET:  Yes, there are a number Exchange Traded Funds (ETFs) that have been created to cater for those who want ESG to be a key part of their portfolios. These funds pool individual investor’s proceeds together to invest in a vast array of ethical investments that are positively or negatively screened continuously by the fund managers. Two such funds are ASX: FAIR (BetaShares Australian Sustainability Leaders ETF) and ASX: ETHI (BetaShares Global Sustainability Leaders ETF). Global investment behemoths Vanguard also run their own international ESG ETF (ASX: VESG).  The below charts show these funds in comparison to their respective benchmarks.  Like the Origin v Infigen chart earlier, the main feature of these charts is that while some times red is winning and sometimes blue is winning, overall the trends are similar.

Chart 2:  BetaShares Australian Sustainability Leaders ETF (blue) and ASX200 index (red).  This chart is for comparative purposes only, and not a recommendation on either holding.
Chart 3:  BetaShares Global Sustainability Leaders ETF (blue) and iShares Global 100 ETF (red).  This chart is for comparative purposes only, and not a recommendation on either holding.
Chart 4:  Vanguard ESG ETF (blue) and iShares Global 100 ETF (red).  This chart is for comparative purposes only, and not a recommendation on either holding.

SK:  Interesting and pretty charts!  I’m interested in how you’ve used the investments above in client’s portfolios.  Is it an all-or-nothing approach, or is it just a matter of adding ESG holdings in as part of a broader portfolio?

ET:  It is very much up to the client. We can make the entire portfolio up of ethical investments and as mentioned above, some blue-chip companies are on the ESG list that form part of many of our client’s share portfolios currently. This means it is easy to invest in ESG without having to invest in companies that aren’t tried and true. If a client wanted to make a small portion of their portfolio ethical, this is also possible. This would work perhaps as an offset to the other companies the portfolio was invested in. Investing small portions of your portfolio in ETHI, VESG or FAIR could achieve this desire giving exposure to a variety of ethical investments and therefore lowering the risk of losing capital through picking individual stocks.

SK:  Finally, in this time of COVID-19, murder hornets, civil unrest and economic turmoil, does this make the case for or against ESG investing more compelling?

ET: Making a change in your investing habits can have a positive effect on the Environment, Sustainability and Ethics of our world. To be able to support a change in human rights or be involved in green energy production without doing much more than watching your funds grow, is the perfect passive way for anyone to support these worthy causes.

SK:  Thanks for this, it is no doubt true that the number of enquiries we are getting about ethical investing has grown significantly, so this is all very interesting information.  The charts and performance information are quite surprising but reassuring to me.  Now, get back to work!

ET: Viva la Revolution for ethical investing, Scott!

What questions has this discussion created for you? If you are interested in ethical investing, please contact the team at Wakefield Partners today.

This website contains general advice which does not consider your particular circumstances. You should seek advice from Wakefield Partners who can consider if the general advice is right for you.