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Ethical investment mythbuster

04 November 2019

Australian Ethical

Australian Ethical has been helping people invest in a better future for 33 years. We offer managed funds, super and pensions – we deliver competitive investment performance for our clients but not at the cost of planet, people or animals.

We’ve been managing money in line with our Ethical Charter for 33 years and our track record speaks for itself.
But despite the strong performance of the ethical investment sector we still hear the same old arguments.
Here are some of the most common myths about ethical investment – busted!

MYTH #1 – Ethical investing means sacrificing returns

Ethical funds perform just as well as mainstream funds, if not better. The Responsible Investment Association Australasia (RIAA) Benchmark Report 2019 shows that responsible investment funds are continuing to outperform most mainstream Australian and international funds, with higher than average returns across one, five and 10-year horizons (net of fees). For example, Australian equities responsible share funds produced an average return of 6.43% over 5 years and 12.39% over 10 years. This compares with returns of 5.6% and 8.91% respectively for the S&P/ASX 300 index.

MYTH #2 – Limiting the investable universe increases risk

Most ethical investors employ screens (usually negative, but sometimes positive as well) that effectively limit the amount of stocks available to invest in. It is often assumed that limiting the investable universe this way will hurt performance, but this has not been the case in practice. Part of the reason is that the companies screened out tend to perform poorly on environmental, social and governance (ESG) metrics – which makes them riskier over the long term. Ethical funds can also add to portfolio diversification because they tend to have a relatively low correlation with the overall market and mainstream funds.

MYTH #3 – Divestment achieves nothing

This one has been doing the rounds in recent months, and it’s true in the financial sense – a company’s bottom line is not affected when its existing shares change hands. But when institutional investors take a stand on ethical grounds they send a strong signal that the companies (or sectors) being targeted no longer have a social licence to operate. That can be a powerful way to create a groundswell of divestment that can have a real financial impact on companies when they attempt to raise new capital.

MYTH #4 – What is considered ‘ethical’ changes constantly

It’s true that society’s idea of what is ethical can change relatively quickly – you only have to look at how attitudes have shifted on marriage equality. But the ESG approach taken by many ethical investors is simply about backing sustainable companies for the long term. For example, we avoid companies that have poor labour practices in their supply chain not only for ethical reasons, but also because it could lead to massive fines and reputation damage down the track. On the other hand, we invest in future-building companies that will drive a sustainable economy and society while delivering returns to our investors.

According to research conducted in 2017 by RIAA, nine out of 10 Australians want their investments to be managed responsibly and ethically. Fortunately, the facts show they don’t have to sacrifice strong long-term performance in order to do so.