What's the deal with ethical investing?

What's the deal with ethical investing?

What's the deal with ethical investing?

Investment has always and will always be concerned principally with risk and return. However that doesn't mean these should be the only factors an investor takes into account when deciding on which investments he or she will make.

In recent history with the reality of global warming becoming a feature of everyday life and with a new heightened focus on environmental issues in social and traditional media it’s no wonder investors are starting to take ethics into account when making investment decisions. On the back of an incredible surge in super and personal investment funds the ethical investments space now commands about $633 billion in assets under management as of the end of the 2016 calendar year.

Clearly then there is both an overwhelming sense of concern about the current state of the planet and an undeniable willingness amongst investors to “put their money where their mouth is”. However these investors making an ethical investment choice are not necessarily doing so at the expense of their portfolio’s overall return.

According to the Responsible Investment Benchmark Report 2016 core responsible investment Australian equity funds actually outperformed both the ASX300 and large cap Australian equity funds over one, three, five and ten year time frames. This enhanced performance could conceivably be attributed to the fact that ethical investments act as a form of downside risk mitigation. Ethical companies and industries are less likely to attract poor coverage in the media and are less likely to prompt government regulation which could both act as anchors to any company's share price. Similarly ethical companies are able to craft a superior public perception of their company which could potentially allow it to cash in on the growing trend of ethical consumption.

Taken at face value then ethical investments seem to offer better returns whilst presumably taking on a lower level of risk; But what exactly defines an ethical investment. When a portfolio manager constructs an ethical investment portfolio they select securities through either positive or negative screening. Positive screening means that securities are specifically selected as part of the portfolio I.E the manager searches for companies who not only limit the creation of negative externalities but who actively affect positive change. Negative screening on the other hand means securities are eliminated from the given investment universe and a portfolio is created based on the remaining securities. Negative screening can often lead to some peculiar situations where “ethical funds” will have large positions in BHP and RIO because the particular fund does not negatively screen out mining stocks.

Ethical investments than are clearly a broad based tool that equally address the needs of both those investor that wants to bring ethics to the table and those that wants to push their investment returns even further.

www.harboursidecapital.com.au is a provider of managed discretionary accounts 

HarbourSide Capital Pty Ltd (ACN: 166 765 537) is a Corporate Authorised Representative (CAR No. 448907) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this material is general in nature and has been prepared without taking into account your objectives, financial situation or needs.

Sources: ASX, Responsible Investment Benchmark Report 2016

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