By Alexandra Brown, Accord Financial Solutions
You now have the choice to invest and effect positive change in the world. Ethical or socially responsible investment is experiencing rapid growth world-wide. By making changes to your superannuation and investments, you can help to create a better future.
What is socially responsible investment (SRI)?
Basically, SRI is about putting your money in companies that make a positive impact in the world and aligning your investments with your values. On a deeper level, SRI refers to the integration of environmental, social, and corporate governance (ESG) criteria into the selection and management of investments.
SRI involves a variety of activities and strategies. The Global Sustainable Investment Alliance (GSIA) defines sustainable investment as involving the following:
1. Negative/exclusionary screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria;
2. Positive/best-in-class screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;
3. Norms-based screening: screening of investments against minimum standards of business practice based on international norms;
4. Integration of ESG factors: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into traditional financial analysis;
5. Sustainability themed investing: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);
6. Impact/community investing: targeted investments aimed at solving social or environmental problems, including community investing; and
7. Corporate engagement and shareholder action: the use of shareholder power to influence corporate behaviour, including through direct corporate engagement, filing proposals and proxy voting that is guided by comprehensive ESG guidelines.
Australia has a well-developed SRI industry with almost half of our $1.24 trillion total assets under management now invested within an ESG framework, according to the latest report by the Responsible Investment Association Australasia (RIAA). RIAA is the peak industry body representing responsible and ethical investors across Australia and New Zealand with over 165 members managing more than $1 trillion in assets.
Financial performance of SRI portfolios
The majority of studies on performance do not find a significant difference in the risk-adjusted returns of SRI portfolios or funds as compared with conventional or unconstrained.
Despite the growing evidence, the performance of SRI is a controversial topic. On one side there are those that believe constraining the investment universe through ESG screening will reduce diversification and lead to efficiency loss or an increased exposure to risk. Others predict that SRI performance will be equal or greater than conventional investments because nurturing positive stakeholder relationships should stimulate superior returns.
The following is just some of the research supporting SRI:
- One of the largest studies was undertaken by Bauer, Koedijk and Otten (2005) comparing the performance of 103 SRI funds with that of 4384 non-SRI funds. The authors found no evidence of significant differences in risk-adjusted returns between SRI and conventional funds for the 1990–2001 period.
- In 2012, Humphrey, Lee and Shen found that investors can incorporate ESG criteria into their investment strategies without incurring any significant cost (or benefit) in terms of risk or return.
- Schröder (2007) compared responsible and conventional indexes and found that SRI indexes do not exhibit a different level of risk-adjusted return than conventional benchmarks.
- In 2000, Statman found the differences between SRI and conventional funds’ risk-adjusted returns are not statistically significant .
- Looking at 15 U.K. ethical funds over the earlier period 1984 to 1990, Luther, Matatko and Corner (1992) found no significance difference in SRI fund performance to benchmarks.
- A recent study by Brzeszczyński and McIntosh (2014) investigated the performance of constructed SRI portfolios. They found that over a ten year period (2000–2010), returns of the SRI portfolios were on average higher compared with corresponding market indexes.
*Past performance is not an indication of future profitability and this should not be considered as financial advice.
What can you do?
Speak to your financial adviser about SRI and how you can use your portfolio to create a better future and align your investments with your values.
Andrew Gaston is a financial planner at Accord Financial Solutions and experienced in SRI and ethical investing advice. He is certified by RIAA and an active Board member of the Ethical Advisers Co-operative.
Where to get more information?
Bauer, R, Koedijk, K & Otten, R, 2005, 'International evidence on ethical mutual fund performance and investment style', Journal of Banking & Finance, vol. 29, no. 7, pp. 1751-1767.
Brzeszczyński, J & McIntosh, G, 2014, 'Performance of Portfolios Composed of British SRI Stocks', Journal of Business Ethics, vol. 120, no. 3, pp. 335-362.
GSIA 2014, Global Sustainable Investment Review, Global Sustainable Investment Alliance.
Humphrey, JE, Lee, DD & Shen, Y, 2012, 'The independent effects of environmental, social and governance initiatives on the performance of UK firms', Australian Journal of Management, vol. 37, no. 2, pp. 135-151.
Luther, RG, Matatko, J & Corner, DC, 1992, 'The Investment Performance of UK''Ethical''Unit Trusts', Accounting, Auditing & Accountability Journal, vol. 5, no. 4, pp. 57-69.
RIAA 2016, Responsible Investment Benchmark Report 2016, Responsible Investment Association Australasia.
Schröder, M, 2007, 'Is there a difference? The performance characteristics of SRI equity indices', Journal of Business Finance & Accounting, vol. 34, no. 1‐2, pp. 331-348.
Statman, M, 2000, 'Socially responsible mutual funds (corrected)', Financial Analysts Journal, vol. 56, no. 3, pp. 30-39.