Socially Responsible Investing

Ethical Investments

Investors often ask about how they can align their investment decisions with their views on sustainable development and their environmental concerns.

Of course, this is a fantastic option for socially and environmentally conscious investors. It means that your money can be actively used to, as the United Nations puts it to: “meet the needs of the present without compromising the ability of future generations to meet their own needs”.  

The challenge of Socially Responsible Investing is how to adopt a sustainability approach with transparent reporting on the metrics that are important to sustainability-focused investors, without compromising sound investment principles.

OUR SRI APPROACH EMPHASISES HIGHER EXPECTED RETURNS

When we consider SRI options, we do so within a robust investment framework that emphasises securities with higher expected returns, maintains a broad diversification, and also minimises transaction costs. 

The strategy chosen in the SRI funds that we recommend, within your QROPS portfolio, pursues higher expected returns through increased weightings to securities with smaller market capitalisations, lower relative prices, and higher profitability.

There are a number of different approaches to ethical investing, such as negative or positive screening. Negative screening seeks to exclude certain companies or industries assessed as having a negative impact on society, including industries with exposure to factory farming, child labour, cluster munitions and landmines, nuclear weapons systems, tobacco, alcohol, gambling and adult entertainment.  Generally, companies connected with these issues can be excluded without a significant impact to diversification.

An SRI fund also includes a focus on shareholder advocacy, and will consider whether the company is acting responsibly on a range of environmental, social or governance issues including emissions metrics, both greenhouse gas emissions intensity and potential emissions from oil, coal and gas reserves.

Please advise us if this is an area where you want your investment portfolio to focus on.

MORE ABOUT Socially Responsible Investing

Why is socially responsible investing important?

By channelling your money towards SRI funds you can have a positive impact on corporate behaviour and awareness of corporate actions on the environment and society.

What is a socially responsible investing portfolio?

With ethical investing, a negative screen is applied to the companies that a fund invests in, in order to exclude areas like armaments, tobacco, gambling, child labour, pornography. 

Socially responsible investing takes this a step further by including positive screening to select companies that are acting responsibly on a range of environmental, social and governance issues.

When did socially responsible investing begin?

It can be argued ethical investing dates back to at least 1758 when the Quakers ruled out investing in the slave trade.

While there have been ethical screening funds around for more than two decades, socially responsible or sustainable funds have only been around for the last 5-7 years.

What are socially responsible stocks?

Socially responsible stocks are companies that are acting to actively reduce their impact on the environment.

Is socially responsible investing effective?

In the earlier years of ethical investing, the criticism was that by actively eliminating some key profitable industries, such as alcohol and tobacco, the returns would be lower and the funds would not be as diversified. While this was true in earlier years this is not the case now. SRI funds can and often do outperform funds which have included these sectors.

"Responsible investment funds continue to outperform mainstream funds over most time frames and asset classes, with Australian figures contributing to the overwhelming body of evidence showing that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet." Quote from: Responsible Investment Association of Australasia (RIAA), Responsible Investment Benchmark Report 2019 Australia

Further evidence that SRI investing improves rather then penalises returns is given in Morningstar’s November 2016 report “Sustainable Investing Research Suggests No Performance Penalty”.

IS THERE A DIFFERENCE BETWEEN ETHICAL INVESTMENTS AND SOCIALLY RESPONSIBLE INVESTMENTS (SRI)?

We believe socially responsible investments are an important option to have. Ethical investments can also be referred to as Socially Responsible Investment (SRI), but we believe there is an important distinction between the two. SRI funds in addition seek to consider investments in companies delivering both a financial and a social benefit. SRI funds may also be referred to as ESG (Environmental Social Governance) funds.

How do socially responsible investments perform?

Research shows that SRI funds perform similar, and often better than broader investment market funds. The RIAA 2019 Responsible Investment Benchmark Report showed that SRI funds outperformed their market sector funds in 1, 2, 5, and 10 year returns, and slightly underperformed on the 3 year performance.

Research has shown companies and countries with a sharper focus on environmental, social and corporate governance responsibilities are less likely to have blow-ups and implosions. This can result in less volatility and may help to generate higher returns over the long term.

What are ESG Investment Funds?

SRI Funds may also be referred to as ESG Investments. ESG refers to investments that take into account Environment, Social and Governance (Corporate) factors.

What are socially responsible investing mutual funds?

A mutual fund is a US terminology, in New Zealand these funds are referred to as managed funds or unit trusts.

Socially responsible investing ETF

Exchange Traded Funds (ETF) is a managed fund that is unitised and listed on a share market. ETFs generally have lower fee structures compared with managed funds. ETFs are listed on share markets, and are bought and sold like shares.

Socially responsible investing pros and cons 

By investing in SRI you will be aligning your views on preserving the environment and mitigating adverse climate effects. By excluding some industries this may negatively impact returns.

Can you make ethical investments in New Zealand Companies?

As the concern for the environment increases more NZ companies are taking a positive move to minimise or reduce their emissions and environmental impact. 

For example, Air New Zealand is using more fuel efficient jets, allowing passengers to off-set their carbon emissions impact through buying carbon credits. The carbon credits are used by other industries that are actively focused on emission reduction. The options for New Zealand investors are limited, but we are able to access international managers with robust sustainability mandates.

What are you doing to reduce your carbon footprint?

At Lyfords are cars have been hybrids since 2011 and in 2018 we replaced one with a plugin hybrid and also a fully electric vehicle. When we fly we offset our carbon footprint by buying carbon credits. We are keen recyclers and continue to plant trees on our life-block section.