You’re passionate about upcycling, always buy free range, and have thank you letters from charitable trusts coming out of your ears. But when it comes to banking, do you principles have to take a back seat? Esther Goh investigates
In the wake of the Global Financial Crisis, many of us have become disillusioned with the state of the financial industry. A UK-based think tank, the Finance Innovation Lab, contends that the current system has lost its core function. Rather than investing in serving the real world, it’s simply caught up in a cycle of making money off money. As a result, society’s values, and the values of the financial system, are now way out of step.
As individuals, we can choose to eschew unethical investments and put our money where it’s invested responsibly. For many of us financial return – preserving and growing our capital – has to be balanced against issues like sustainability, pollution, climate change, labour conditions, corporate ethics and public health. Directing our money toward organisations that operate in line with these values is an effective way of taking a stand.
What exactly constitutes an ethical investment, though? It’s a grey area. Traditional ‘sin stocks’ include gambling, tobacco and armaments. Excluding investments that cause or support social or environmental harm could also stretch to boycotting: companies that test products on animals; mining companies; or companies associated with sweatshop labour. Some people might see fast food or alcohol as harmful industries. In many cases, it comes down to individual values.
“What is an ethical investment to you might not be an ethical investment to me,” says local financial author and advisor Martin Hawes. It can be difficult to draw a firm moral line, he adds. For example, if you are anti-gambling, would you boycott an electricity company that did business with SkyCity?
Banking for the better
Banks are privately owned and focused on profit for shareholders, but if that doesn’t suit you, it’s possible to look elsewhere.
Credit unions and mutual building societies are cooperatively owned by those who use them. Instead of serving bigwig shareholders, they return profits to ‘members’ (account holders) in the form of lower fees and interest rates, or community sponsorship. Ultimately, this money stays local; the New Zealand credit union and mutual building society sector is currently worth more than $1.4 billion. These financial institutions provide many of the same products and services that banks do, such as everyday accounts, insurance and loans. However, you get to vote at the annual general meeting and can even put yourself forward as a board member. Although credit unions and building societies tend to have slightly lower credit ratings compared to big banks, that’s not to say they aren’t stable. Many have been around for decades.
Credit unions and building societies are governed by legislation (the Friendly Societies and Credit Unions Act 1982 and Securities Act 1978 respectively) and monitored by the Reserve Bank of New Zealand.
More information can be found on the Co-op Money NZ (formerly New Zealand Association of Credit Unions) site: www.coopmoneynz.org.nz.
Looking to park some cash in savings accounts or term deposits? There are opportunities for social good at the same time. Prometheus is a regulated finance company with a “sustainable” and “responsible” philosophy. It lends out savers’ money to individuals and organisations – charities and community enterprises – for projects ranging from business and education to housing. For example, funding has gone toward an organic produce business, an animal sanctuary, and eco-housing initiatives around the country.
Meanwhile, the Quaker Investment Ethical Trust, which is open to all, accepts deposits and lends out to non-profits (such as the Trade Aid Charitable Trust), small businesses, and low-income families and individuals to help them break the cycle of poverty.
Ethical funds get a “burst of publicity” every now and again but have not caught on perhaps as much as could be expected. One reason, suggests Hawes, might simply come down to education.
“People find the whole investing thing so difficult anyway. When you add another layer of complexity, people think it’s just too hard.”
While the growth of responsible investments has been slower than expected, the latest report from the Responsible Investment Association of Australasia (RIAA) identified a “small but significant” increase in people choosing to invest their money responsibly, and a growing public appetite for ethical investments.
According to the RIAA, responsibly managed assets currently total around $27 billion in New Zealand, representing about 40 percent of total managed assets. Much of this is accounted for by the Super Fund, which was criticised a few years ago after inadvertently investing in tobacco companies and manufacturers of cluster bombs. Its guidelines prohibit investments in companies involved with whale meat processing and the manufacturing or testing of nuclear explosive devices, among other things.
The old school of thought that you can’t enjoy both profit and principle is outdated. Increasingly, environmental and social governance (ESG) is perceived as a positive influence on a company’s financial performance rather than a drag, and a boost to their reputation.
“When compared to benchmark indices and the average returns of mainstream funds, core responsible investment funds have outperformed across the majority of fund categories and time horizons,” the RIAA report concluded.
Ethical investing requires more care. Discarding whole industry sectors would dangerously limit your portfolio. On the Gareth Morgan Investments website, chief investment officer Simon O’Grady explains the firm avoids investments primarily involved in tobacco, gambling and weapons; beyond that, screening relies on the judgement of the investment team, although private clients can mark certain investments as ‘do not holds’. However, O’Grady says investors generally want “balance” rather than a total focus on environmental and social governance, while also meeting diversification and risk objectives.
The old school of thought that you can’t enjoy both profit and principle is outdated
While it’s easy enough to boycott shares in individual companies, things aren’t as clear-cut if you’re investing in managed funds, which have holdings in multiple companies. Luckily, a number of dedicated funds now tout socially responsible investment as a selling point.
Overseas we are seeing developments in standardising and monitoring ethical investments. The UK’s FTSE4Good index is one example, and a great place to start identifying socially and environmentally responsible companies. There aren’t yet any across-the-board standards or certifications here, so the onus largely falls on individuals to do their own research. AMP is among the major institutions that offer ethical funds in New Zealand, as well as the likes of Tyndall and Pathfinder. There are also several ethical KiwiSaver schemes, including ones offered by SuperLife, Grosvenor, Fidelity and Koinonia.
If investing responsibly is a priority for you, there’s never been a better time to put your money where your values are.
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For more from Esther Goh’s Financial Smarts series, click here.