We are the World – What is Socially Responsible Investing?
So, you have decided you want to save the planet. Of course, you have started recycling the oil from the local fish and chip shop as a substitute for petrol. Now you want to turn your attention to your investment portfolio.
Well what better way to change behaviours. You can educate people, that takes time. You can also invest your cash into more socially acceptable business practices that are more sustainable. Money talks and businesses need cash to survive. If board rooms are hearing they aren’t going to receive funds due to their business practices, they will sit up and listen!!
There are thousands, if not millions of investment choices you could make to help you achieve your goals. You can buy an investment property, save into your Kiwisaver account, buy shares, bonds etc.
Let’s look at what is Socially Responsible. The United Nations has defined Sustainable development as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs”
So what do you look for?
To improve sustainability we need to look out for companies that are high emitters of greenhouse gases such as carbon dioxide, methane and nitrous oxide. Look at how companies use their land and the impact they have on biodiversity (the level plant and animal life in the local habitat that is considered important) See whether they have had any toxic spills, how they manage their waste and water.
We also need to focus on social screens. These include whether or not a company is involved in the production, servicing and sales of cluster munitions and landmines, nuclear weapon systems, child labour, factory farming, tobacco, alcohol, gambling and adult entertainment.
Socially responsible investing looks at either excluding or including less of these companies that are involved in the activities mentioned above in portfolio design.
There are also a few things to consider that you should be seeking in any investment portfolio:
- Broad diversification so that you can capture returns wherever they may come from and minimise any shocks. Own as much of the market as you can.
- Asset allocation. This is probably the single biggest feature of an investment portfolio that you should focus on. An allocation weighted towards growth assets produced higher returns over the longer term along with greater volatility and risk. Growth assets include shares and property. An allocation weighted towards defensive assets produces less volatility and lower returns over the longer term.
- Overweight your portfolio according to assets that are known to deliver superior returns like small companies, value (cheap companies) and profitable companies.
- Focus on what’s important to you. Growth or income?
So we have conflict. Excluding these companies can impact on your diversification and therefore impact on your risk exposure and your long term performance.
It becomes really important to get a balance where by your portfolio is excluding and under weighting particular companies yet maintaining maximum exposure to performance and limited to risk.
You can do this by focusing socially responsible metrics within a portfolio. An investment company was able to reduce emissions from its portfolio by 76% outside Australia and by 99.1% from its Australian portfolio.
This screening and under weighting of companies that don’t meet socially responsible criteria also saw improved performance across their developed markets. These include countries like US and UK. This portfolio had slightly more risk in terms of volatility. In developing markets, including countries like China, Brazil and India, the performance was slightly lower as was the risk. When you think about where fossil fuels are being used the most, this would make sense. Developed markets are moving more to renewable energy while developing markets are using a lot of natural resources to provide their energy.
What if you are a property investor? Well, there are all sorts of sustainable practices out there. Have you seen the super home movement? Some of their building require little or no use of the national electricity grid. Homes can be built using recycled materials and are built not to meet the building code, but exceed minimum building requirements. Why would you want to achieve the minimum for your most valuable asset?
So in summary. There are options available to investors without compromising on some important investment fundamentals like diversification, performance and risk.
It really comes down to your preferences, values and goals. Which is what investment have always been about.
- Posted by Isbister
- On May 21, 2019