Every decision we make with our money, in the end, is a choice about what’s important to us and the sort of world we want. Our investments are no different.
Ethical and sustainable investment simply means aligning our investments with our values.
Let’s start with ethical investing. There’s a range of terms for it - ethical investment, Sustainable Responsible Investment (SRI), Responsible Investment, environmental, social, governance (ESG) engagement, impact investing. As the Responsible Investment Association of Australasia defines it, “responsible investment is a process that takes into account ESG and ethical issues into the investment process of research, analysis, selection, and monitoring of investments.” These ESG issues can include environmental (pollution, climate change, water, and other resources scarcity), social issues (local communities, employees, health and safety), and corporate governance issues (prudent management, business ethics, strong boards, appropriate executive pay). Increasingly, these issues are risks – to the companies themselves, and to investors.
We use the term 'ethical investing' because it
People generally have one or more of three aims: avoiding harm, benefiting stakeholders, contributing to solutions:
Does it cost?
Many people assume that investing ethically will come at a cost. Fortunately, the news is good.
According to recent research by the Responsible Investment Association of Australasia (RIAA), ethical
investment funds performed at least as well as their peers.
That makes sense to us. Companies which are better at ESG treat all their stakeholders better – their
customers, their staff, the environment and so on. They’re more likely to have happier staff, more loyal
clients, reduced environmental costs, have more diversity so make better decisions - so should be more
Because we are all different, there is no one approach that works for everyone. Nor is there a ‘perfect
investment’ – there are always trade-offs. Ethical Investing NZ counsels taking a pragmatic approach: doing
something is better than nothing, some approaches are more effective than others, and every year there
are more and better options.
Increasingly, the biggest issue of all is climate change – yet until recently few ethical investments take it into
account. We’re now seeing new, smarter approaches that explicitly look to measure and then reduce
the CO2 impact of their investments. However, there is still the potential for 'greenwash'.
Many advisers and funds provide ethical investment solutions. That’s a great start – but it can be a costly one.
Most investment funds – ethical or not - are “active”. Most advisers believe that, too. They try to pick winners. Each claims they and they alone have the ‘secret sauce’. But the evidence is clear: trying to pick winners doesn’t work. Around the world, most investment funds that follow this “active” approach not only don’t achieve the market, they also underperform the market. They’re also very costly. The result? Investors and advisers who follow this approach use costly, narrowly-diversified funds, so you wind up with lower returns and greater risks. That’s why index and passive funds have become so popular – but there isan even better way.
Based on rigorous academic research here and overseas, we believe that markets are efficient and prices reflect all available information. We favour investments that are proven to have higher expected returns over time – smaller companies outperform larger ones, ‘value’ companies outperform ‘growth’ ones. We look to keep transaction and other hidden costs as low as possible. We also seek to reduce the risk for investors.
Until recently, you could either invest in efficient, low cost funds, or in ethical investment funds. We believe a well-constructed portfolio can reflect your personal values, whilst maintaining a low cost, evidence-based solution to help you meet your goals.
We call it Sustainable Investment
Sustainable Investment (SI) marries the two key aspects of investment:
SI is the best of both worlds – investing on values and ESG basis, but in a way that is low-cost and targets higher returns. It really is the best of both worlds.
Some firms offer ethical investment as an option. Others offer low-cost asset class funds. Ethical Investing NZ was the first advisory firm in NZ to make SI central to what we do. It’s the culmination of founder Peter Lee’s 20-year involvement in ethical investment, from setting up ethical funds to providing great solutions. We’re proud to be leading the way in SI.
In conjunction with our research partner Consilium, backed by research from Morningstar and ourselves, we’ve designed a series of sophisticated, low-cost SI solutions. Click here to find out more, and about how we apply our philosophy to what is still an imperfect market here in New Zealand.
Rob and Mary