The growth of ethical investments in Australia
Does your superannuation fund invest your balance ethically? Find out how you can make sure your money is invested where you want it to be.
Do you know how your superannuation fund invests your retirement savings once they’re deposited in their account? As long as the balance keeps growing each year, many people are simply happy to “set and forget”.
But that’s not the case for all Australians. An increasing number of people are taking an interest in what super funds do with their retirement savings. Rather than taking a back seat, these Australians want their super investments to reflect their values and beliefs, targeting industries that produce positive social and environmental outcomes.
To find out more about how ethical investing works, finder.com.au spoke to Simon O’Connor, CEO of Responsible Investment Association Australasia (RIAA).
What is ethical investing?
Ethical investing, O’Connor says, is the result of people bringing some of their values and beliefs into the way they want their money to be invested.
“We've seen two big things occur in the investment industry in the last few years,” he explains.
“One is that consumers are wanting their investments to align with their own values, and so we see a lot of increasing interest in ethical investment products, where a number of industries that might traditionally have been considered bad would be excluded from ethical investment products. So that might be tobacco or cluster bombs or landmines or gambling or pornography or weapons.”
O’Connor says this approach is called negative screening, where the super fund “screens” how members’ money is invested. As a result, ethical investment products are becoming more diverse. Similarly, some super funds employ positive screening.
When funds employ positive screening, they target industries that have a positive social and/or environmental outcome. Some examples include companies that are working on innovative medical technologies or renewable energies, health industries, medical industries or energy-efficient companies.
“At the other end of the industry, we increasingly see that in some of the largest institutions in Australia, managers and superannuation funds are taking what they call a responsible investment approach, which is less about values and ethics and more about an understanding that companies that operate more sustainably tend to [deliver] better investments.
“As a result, just from a pure investment perspective, many of the largest institutional investors in Australia now consider as part of their everyday investment decision-making process environmental factors and social factors, asking questions like: Are they polluting the environment? Are they looking after their employees? Are they working well with the communities within which they operate? Because these have become really important indicators of companies that are going to perform well in the longer term.”
Why has ethical investing increased in popularity?
The Ethical Investment Association was founded in 1999 for investors who wanted to align their savings with their values.
“I think, as the superannuation industry has grown, what we've seen over the last decade and a half is, in fact, most industries now have really been impacted upon by ethical consumption or conscientious consumers,” O’Connor says.
“So whether you think about the sweatshop workers making Nike shoes a decade ago and how much that has changed the way sporting goods are manufactured, or whether you think today of fair-trade coffee and chocolate and free-range and organics, all of these things have really mirrored a rise within the Australian population of wanting to do things more ethically and more consciously. I think that has slowly set through to the finance sector where, increasingly, people are asking similar questions about how their money is invested, and that they're not wanting their money to be invested in industries they don't believe in.
“We've seen this really become more of a mainstream concern. [There has been] strong uptake in the last couple of years where funding flows have doubled, and where demand is really going through the roof. I think we're starting to see a big shift in the way investment markets operate, and within superannuation now, most of the big super funds will be hearing from their members on a very regular basis on issues that traditionally would have been seen as non-financial, but these days it will be central to how money is being invested.
“I think increasingly super funds are talking more and more about the positive impact that their investments are having. So whether it's investing in renewable energy, or building a new hospital, or investing in affordable housing, or helping to provide microinsurance products in developing countries, or building cancer research institutes, I think people feel really good when they know that their savings are actually put to work to support good projects whilst also generating good investment outcomes.”
The performance of ethical investments
While investing in ethical companies is undoubtedly a noble idea, is it worth it? Does the performance of sustainable investments make them a viable option?
“I think what's really pleasing and [has] helped to push this industry along is the fact that the investment performance monitored by our office has been really, really strong, and I think we increasingly see good evidence to support this,” O’Connor says.
“One example is our benchmark report. Each year we do an analysis of the size and growth of ethical funds versus mainstream funds. This year for example, core responsible investment Australian equities funds outperformed the average large cap Australian equities funds across one, three, five and 10 years.”
“But beyond our own analysis, we're seeing some strong academic literature and analysis that has looked at studies over a number of years and has found, again, a really strong correlation between strong financial performance of companies and the way they manage their sustainability-related issues, indicating again that sustainable companies make stronger investments.”
This, O’Connor says, has helped push ethical investing into the mainstream. “It's not just a soft or fluffy thing for some really deeply entrenched greenies, but this actually matters for better understanding all the factors that are impacting on the movements of the share price and share markets,” he says.
How to invest ethically
How can you ensure that your money is invested ethically? If there’s an issue that’s important to you, ask your super fund what they’re doing about it. Regardless of whether it's climate change, human rights, weapons or animal welfare, don’t be afraid to ask.
“I really encourage people to ask the question of their super funds about the issues that are important, and if you're not comfortable with the response that's come through then you should have a look at the other options,” O’Connor says.
“There are some simple things people can do, and most super funds will have a page on their website talking about responsible or ethical investing, so it's worth having a look there. We have a website where we provide a full list of about 90 different investment products that are certified and make it much easier for people to understand what's in and out of one product versus another.
“In the next month, we'll be launching an app that helps people to actually say, ‘Right, I'm looking for a superannuation fund. I'm really interested in fossil-fuel-free investments, or something that avoids tobacco,’ and then it will pop up the funds that match those criteria.”
If you’re concerned about where your money is invested, or if there’s a particular social or environmental issue that worries you, O’Connor says it’s time to take action.
“What's often interesting to me is that when you ask Australians whether they would be happy if their superannuation was invested in tobacco or landmines or child labour or other issues like that, the vast majority will say to you, ‘Hell no. I would expect that my super is not invested there.’ And unfortunately, there are a lot of superannuation funds that are still invested in industries that I think most Australians wouldn't be comfortable with,” he says.
“Consumers really should engage with their superannuation and tell them what's important to them, and be willing to then move their super or their investments to an option that better meets their own values and beliefs.”
The Responsible Investment Association Australasia (RIAA) is the peak industry body representing responsible and ethical investors across Australia and New Zealand.