Many people won’t invest in products that are socially or environmentally damaging. They think investing in the wrong companies promotes these bad practices.

The basic idea of ethical investment seems simple, but in practice it’s not – socially responsible investment (SRI) is far from easy.

Where does the sinning stop?

The underlying principle of SRI is to shun ‘sin stocks’ – shares in products that make the world worse for people, or the environment.

Many people decide not to help companies making weapons or cigarettes, or those which promote gambling, or use child labour.

However, SRI isn’t straightforward. For example, you may detest gambling and decide to exclude entertainment and gaming business SkyCity from your portfolio. But what about SkyCity’s suppliers: their bankers, electricity suppliers, and communications companies? Should you refuse to invest in them as well?

If you decide to veto those suppliers, you may also refuse to invest in SkyCity’s suppliers’ providers, and their providers – and so on. If you took this policy to its logical conclusion, hardly any companies would remain for you to invest in.

And of course, if you’ve decided to shun SkyCity, can you invest in managed funds? Many managed funds in New Zealand will own some SkyCity shares, so you would have to exclude them from your portfolio too.

Soon your possible investment universe is shrinking, leaving you few opportunities to make money.

On the other hand

Perhaps I am targeting SkyCity unfairly. In fact, the social responsibility policy the casino operator outlines in its annual report is as comprehensive as any company’s. Its board even has a ‘Corporate Social Responsibility’ subcommittee.

So maybe we should all invest in SkyCity, voting with our money in favour of what it does for diversity, gender remuneration parity, and commitment to the Rainbow Community.

You may not like the idea of owning casinos. But perhaps SkyCity does far more good with its governance practices than it does harm with its gambling operations.

It’s a niche investment sector

So, what’s an investor to do? How do you try to do good with your investments?

First, look for SRI-managed funds. A few of these are available in New Zealand, including some KiwiSaver funds. However, these are all very small and would be difficult to recommend.

SRI funds are certainly more common overseas, including in Australia.

Research is unclear on whether the returns on these SRI funds are better or worse than ordinary funds. But on balance, you would expect socially responsible investors to be prepared to accept lower profits, as long as their investments were having a social or environmental impact.

Some studies do show that the returns of SRI funds and ordinary funds are similar. However, generally you would expect SRI funds to provide lower returns. That’s because of the much smaller pool of suitable companies available to invest in.

Options for socially responsible Kiwi investors

Some overseas SRI-managed funds are ‘activist’. They buy shares in a company whose industry or business practices they don’t like. Then they try to get a seat on the company’s board or, perhaps, agitate at its annual general meeting.

I don’t know of any such examples in New Zealand. But certainly funds overseas buy shares as ‘activists’ for social responsibility, and these funds may be attractive to you.

Some exchange-traded funds (ETFs), such as iShares, have socially responsible funds big enough to provide a broad exposure to companies that will have a positive environmental, social or governance impact. These funds may be a simple and fairly good option for New Zealand investors.

Do your own research

Another difficulty lies ahead for those interested in the SRI sector. You can search SRI funds on the internet and make an investment. But it’s difficult to get advice on them. You largely have to do your own analysis, and hope you’ve made the right choice.

Your research will involve studying the investment processes of the funds. You will also need to look at what the funds own, to ensure they do not breach your personal principles. A ‘good’ company for one socially responsible investor may not be perceived the same way by another individual.

More complications

Investing wisely is difficult enough already, but SRI adds another layer of complexity to the task.

Personally, I take a fairly simple approach – I try to exclude companies in some of the industries I consider the worst (for example, tobacco and armaments). As a direct investor mostly owning individual stocks, I can do this as long as I’m not too ambitious and I don’t try to take SRI too far.

After all, other ways of trying to leave the world a better place do exist – it doesn’t all have to be done with investments.

DEFINITIONS

EXCHANGE-TRADED FUND (ETF): A security that tracks an index and trades on an exchange. An index is a cluster of assets sharing the same characteristics. Shareholders do not directly own the underlying investments in the ETF, but receive a share of the profits.

MANAGED FUND: An investment fund that pools money from different investors and managed by a fund manager, who determines the composition of the fund’s underlying assets. Each investor owns a portion of the total fund.

Martin Hawes is an Authorised Financial Adviser. Martin’s disclosure statement is available free of charge at www.martinhawes.com. This article is of a general nature and is not a substitute for personalised financial advice.

First published 24 November, 2016

By Martin Hawes

The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.