Right approach key for ethical investors

Ethical investing is a hot topic right now for both charitable organisations and private investors, who are increasingly questioning the impact of their investing.

For anyone interested in ethical investing the overarching objective is almost always the opportunity of generating a social dividend (reward) alongside a financial return. But as is often the case, when people and organisations pile into any new trend without enough critical thought, problems are bound to arise.

When people first set out on an ethical investment path, they often put in place a blanket ban on entire categories of stocks – we call this a negative investment screen. The downside risk of this generalised approach is the specific ethical intent is diluted. A current example of this is the renewed stance against investment in fossil fuel companies due to concerns about climate change. It’s perfectly justifiable to take that position – but I’d suggest investors should ask themselves whether an equally valid approach would be to invest in something that helps advance renewable technology? While I’m not arguing for or against investment in fossil fuel companies, in this example, what I am saying is that rather than a negative investment screen, investors need to apply deeper analysis. It might be worth considering that some of the largest investors in clean energy in the world are fossil fuel companies – because they know that’s the end game and to survive, they must embrace change. Therefore, the potential irony is, if you exclude them altogether you might not be supporting the outcome you’re hoping to achieve.

It’s important to know what you’re getting into with anything labelled an ‘ethical investment’. When it comes down to it, in my view there are three distinct investing approaches:

• You can stand for something – you decide to be an agent of change, targeting companies that are leading the charge.
• You can stand against something – you clearly identify what you won’t allow e.g. “no cigarette or gambling stocks are to be in my portfolio”.
• You can stand alongside something – this is a more passive approach, typically in the form of investing in companies or funds that operate in sectors that you don’t necessarily support but are focused on doing the least harm possible.

To stand for something you might choose impact investing, an emerging branch of ethical investing where you allocate money to a cause, project or organisation with the aim to have both an economic and social outcome.

For example, you might choose to invest in a social housing project that gets 100 people off the street and helps to integrate them into productive society. This is generally structured as a ‘social impact bond’ with the return being paid by government to investors for saving taxpayers’ money that would have been spent on social services accessed by the people if they continued to live on the streets.

In this way, impact investing powerfully leverages the concepts of philanthropy by starting with an altruistic objective and ending with a commercial benefit.

What’s making all of this more attractive now is the fact that ethical investments are becoming more investable and less speculative (risky). In fact, research has shown, companies that are adopting increased focus on Environmental, Social and Governance (ESG) factors in their business models have outperformed as the market increasingly values them on this measure.

For Not-For-Profits and ‘mums and dads’ who want their investments to reflect their core values, its critical they take a deeper look to understand the potential impact of their investment approach and ensure outcomes of those decisions align with what they are trying to achieve.

Simon Montgomery, Pitcher Partners Perth