Ethical investing guide

01.Introduction

Did you know that huge chunks of our superannuation — which is now worth more than a trillion dollars — are invested in companies involved in industries such as old-growth forestry logging and uranium mining, and products that cause greenhouse gas pollution? Or that state governments’ super funds are investing hundreds of millions of dollars of their employees’ super in gambling, cigarette and oil companies?

When making investments, super funds and fund managers aren’t required to take into account labour standards and social, ethical or environmental considerations, unless they specifically say they do.

That’s where ‘ethical’ and ‘sustainable’ investing comes in. Or does it? Even if you opt for what you think is the ‘green’ option on your super fund’s investment menu, you might still be directing money into some of those industries. Here are some examples, which reflect what’s going on in much of the industry:

• Most ‘ethical’ and ‘sustainable’ funds in Australia invest in big uranium mining companies such as BHP Billiton and Rio Tinto. Funds justify this on the basis that the uranium is used for nuclear energy, not weapons, or that the companies chosen get a limited proportion of their overall revenue from uranium, or that they have good environmental, social or corporate governance performance.
• A number of sustainable funds invest in companies that have direct involvement in gambling. For example, some funds invest in Macquarie Bank, which has gaming joint ventures with Tattersalls in the UK and Publishing and Broadcasting (PBL).
• Until recently, BT Financial Group's Australian Sustainability Share Fund invested in PBL and poker machine producer Aristocrat Leisure. (The fund doesn’t currently hold those stocks, and BT also offers an ‘ethical’ fund that avoids investing in gambling, tobacco and companies that mine uranium for weapons manufacture. See Table 1 in Funds compared).
• Sustainable Asset Management invests in Tabcorp and cigarette giant British American Tobacco, and its investment approach means that no legal industry (including, for example, armaments) is off limits.

In some cases, a broad interpretation of what can be allowed into ‘sustainable’ funds flows from the fact that a super fund is legally obliged to make as much of a profit for its members as it reasonably can. This necessity prevents funds from heading off down ethical paths that might be too speculative or risky, and makes some mainstream investment in areas like uranium mining and banking almost inevitable. You might want your investments to improve the world rather than damage it, but you still want money to retire on at the end of the day (Table 2 in Funds compared shows some average comparative returns).

So what do the terms ‘ethical’ and ‘sustainable’ investing mean and what are the differences between the funds on the market?