Ethical investing guide

You might be surprised where some ethical and sustainable funds invest your money.
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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?

Please note: this information was current as of August 2007 but is still a useful guide to today's market.


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The industry, which can be broadly labelled the ‘responsible investment’ (RI) sector, offers two distinctly different types of fund. Their names are often used interchangeably and some RI funds use a combination of the two approaches:

"Ethical" funds

Investment strategies are guided by an ethical or moral framework.

  • The fund manager usually seeks out companies that it believes have a positive social or environmental impact. This is called positive screening — a ‘dark green’ approach.
  • At the same time the fund manager avoids companies that have a negative social or environmental impact. This is known as negative screening — a ‘light green’ approach.

Of course, how each ethical fund manager defines subjective terms such as ‘ethical’ and ‘positive impact’ differs. Their product disclosure statements, which are usually available online, should provide an explanation.

For examples of traditional ethical funds, see Deep green funds.

"Sustainable" and "responsible" funds

The majority of funds in the Responsible Investing sector define themselves as sustainable or responsible, rather than ethical. Some of these funds invest in industries such as gambling and tobacco, if they rate the companies chosen as being sustainable for the long term — a best of sector approach.

Other sustainable funds invest in industries that are usually negatively screened out, as long as the revenue that the companies chosen get from those industries is not a ‘material proportion’ — for example, 5% or more — of their overall revenue.

In fact, many of the top shareholdings of these ‘sustainable’ funds end up being very similar to the shares held by the same companies’ ordinary investment funds.

Changing names

There’s been a reduction in the number of firms calling themselves ‘ethical’, with terms like ‘sustainable’ and ‘socially responsible’ used instead.

Even the industry’s representative body, the Ethical Investment Association, has changed its name to the Responsible Investment Association of Australasia. “The name change reflects an expansion of the sector rather than a shift away from ethical investing,” says its Executive Director, Louise O’Halloran. “Our name will now be in line with the growth in the sector and capture the diversity of our members.”

Most of the sustainable funds listed in Table 1 of Funds compared restrict investment in certain industries, although some have relaxed the rules in recent times. For example, BT changed its position on uranium in 2005, allowing into its ethical and sustainable portfolios companies that mine it for use in nuclear energy, arguing that it’s cleaner than coal. That’s a controversial issue, though — some deep-green investment funds still oppose uranium.

AMP’s Sustainable Funds team thinks nuclear power and the uranium industry are neither financially nor environmentally sustainable. It doesn’t invest in companies that are ‘primarily’ involved in uranium mining, but does invest in BHP, which gets less than 5% of its revenue from uranium. For more information, see AMP's position paper on uranium.

Best of a bad lot?

Some sustainability funds take a ‘best of sector’ approach, allowing them to invest in, say, the top 20% to 35% of companies in every sector, ranked on sustainability performance grounds. This can allow funds to invest in companies from every industry, as long as they rank the companies chosen comparatively well for environmental, social and governance (ESG) criteria.

For example, Sustainable Asset Management (SAM), which developed the Dow Jones Sustainability Index (DJSI) and the Australian SAM Sustainability Index (AuSSI), can invest in any industry, as long it believes the sector and at least one of its companies are moving in a positive direction towards a sustainable future, and the sector has listed companies on the stockmarket.

The DJSI has 58 industry sectors including, for example, tobacco. Although cigarettes cause enormous health problems, SAM rates British American Tobacco as being the ‘sustainability leader’ in the tobacco sector, noting that it broke ranks with the rest of the tobacco industry by admitting that its product is addictive. “The company is moving to reduce its negative impact on society, admittedly from a very poor starting point,” says a spokesperson from SAM. “Sustainability leadership suggests that while a product like cigarettes isn’t illegal, a leading company must be in the frontline of its industry’s efforts to reduce the negative impact of its business on society, in a manner that’s in the long-term profitable interest of the company as well as the long-term social, environmental and economic interest of the community.”

SAM also gives the example of firearms manufacturer Smith and Wesson, which introduced child locks to handguns a few years ago: “That’s an example of a company evolving and leaving the dinosaurs in its sector behind.”

Jargon buster

  • Ethical investing: Investment approaches that reflect the ethical preferences of the investor.
  • Sustainability: The concept that humanity should act in a manner that doesn’t undermine the options available to present and future generations.
A few funds continue to call their products (or themselves) ‘ethical’, screening out companies and industries that they think fail to meet their ethical criteria, and using positive screening methods to find companies that they assess as making a positive impact on society, the environment or both.

Australian Ethical opposes investment in uranium and excludes companies involved in areas like alcohol, tobacco and the logging of old-growth forests. It uses positive screening to find companies that it thinks make a positive impact.

Christian Super offers a choice of five ‘ethical’ funds. It aims to invest “in accordance with Biblical principles”, screening out companies involved in gambling, tobacco, pornography, abortion drugs, embryonic stem cell research, child labour, fast food, alcohol and weapons.

In some cases, the rules can be relaxed, allowing investment in companies involved in industries such as alcohol, as long as alcohol contributes less than 5% of their revenue. BHP Billiton and Rio Tinto are included, but uranium miners with poor corporate and social responsibility (CSR) performance are ruled out.

Hunter Hall's negative screen restricts investment in companies deriving revenues from armaments, tobacco, gambling, factory farming, destruction of the environment and uranium mining. Its ethical policy doesn’t take labour standards into account, however; nor does it restrict investment in alcohol companies, companies using animal by-products, or other types of mining.

“We are of the view that mining does not necessarily cause permanent damage to the environment, provided that due attention is paid to site remediation, control of contamination, worker safety and the welfare of any nearby population,” a company spokesperson says.

Note: Hunter Hall launched a deep-green fund in late 2007. The Global Deep Green Fund uses positive screening.

Table 1

This shows a range of ethical and sustainable super funds, the different investment approaches they take, and examples of where they can and can’t invest. Some of the same options are often available through large super funds.

    Investment returns
(% pa)
RI approach
Industries included **
Fund name Other large funds offering this investment* 1 year 3 years 5 years Best of sector Positive screen Negative screen Alcohol manuf. Defence Gambling Uranium mining
AMP Capital Sustainable Share (S) Qsuper, UniSuper, ARIA, Sunsuper 23.99 23.9 18.03 •(D)
Australian Ethical Super Equities Asgard, Navigator, Macquarie Wrap 32.84 21.12 15.77
BT Institutional Australian Sustainability Share Australian Super, BT SuperWrap, UniSuper 23.76 25.27 17.62
BT Institutional Ethical Share Australian Super, BT SuperWrap, UniSuper 32.99 31.65 23.63 •(E)
Challenger Socially Responsive Share Asgard, BT Wrap, Macquarie Wrap 28.46 23.92 16.81 (B) (B) (B) (B)
Hunter Hall Australian Equities Asgard, BTWrap, ING, Macquarie Wrap 35.42 18.14 na
ING Sustainable Investment Australian Share ANZ & ING One Answer, ANZ & ING Corporate Super 26.84 24.41 na
Perpetual Ethical SRI Australian Super, BT SuperWrap, MLC MasterKey 33.17 25.33 na (C) (C) (C) (C)
SAM Sustainability Leaders Australia Fund (A) Vic Super, JUST Super, Statewide, Vision Super 25.17 24.93 17.16
Benchmark ASX 200 Index 28.7 26.3 19.32

Table notes

Investment returns as at 30 June 2008 after fees. Source: Morningstar and the investment funds.

* Or a similar option from the same fund manager.
** Shows whether the fund can or can’t invest in these industries.

na Not applicable.

TBC To be confirmed.

(A) Challenger may invest in this industry in volatile markets for risk management purposes.
(B) Not allowed if the company receives a ‘material proportion’ of its revenue from this industry.
(C) AMP’s ‘materiality’ clause means that it invests in BHP Billiton, as the company gets less than 5% of its revenue or profits from uranium.
(D) Not for weapons manufacture.

05.Your role as investor


Where can you invest?

Your super fund

Most large super funds offer a sustainable option, often outsourcing the investment function to a large fund manager. You don't have to put all your eggs in one basket — super funds often let you divide your investments among several options (for example, their 'responsible' and ordinary share funds).

Managed funds

Most of the same investment funds and managers are available outside super. A number of specialist funds invest in areas that are considered responsible and sustainable, such as renewable energy.

Individual investments

You could always invest in particular shares, and in companies you believe are acting responsibly and ethically, without going through a managed fund. And some super funds allow individual share selections from ASX 200 companies.

It's your call

Responsible investment' helps people to invest in line with their values and their financial needs. However, investors are hampered by the fact there's no single definition for what can be called 'ethical', 'sustainable', 'socially responsible' or 'socially responsive'.

You might, for example, oppose banks that charge penalty fees (which may themselves be illegal) to disadvantaged consumers, while you have no ethical issue with companies that brew beer, conduct stem cell research or mine uranium for nuclear energy.

Or perhaps none of that matters to you, but you buy into the risk-management argument that 'sustainable' companies — those showing good environmental, social and corporate governance performance — are likely to be more profitable in the long run.

Whatever your view, the bottom line is that if you want to take ethical or sustainability criteria into account when investing, you need to find out exactly where your money is going, so you can make an informed choice.

Don't get caught out by the ever-changing industry jargon. You may be able to choose amongst 'ethical', 'sustainable', 'socially responsible', 'eco' and 'socially responsive' funds, but what counts is where their dollars are flowing, not the marketing spiel.

More information

It's important to do your own research when comparing funds.

The Responsible Investment Association Australia is a good starting point, detailing the investment strategies of ethical and sustainable funds that have been certified through its certification program.

Another option is to get professional advice (an adviser accredited by the EIA may be able to help). Make sure your adviser is licensed by the Australian Securities and Investments Commission (ASIC).

The Ethical Investor magazine and website ranks the social, environmental and corporate governance of Australian companies and investment funds. It also covers corporate governance, the ethics of mainstream investment and information on socially responsible finance products.

Principles for responsible investment: these principles were developed by an international group of institutional investors, reflecting the increasing relevance of environmental, social and corporate governance (ESG) issues to investment practices. The process was convened by the United Nations Secretary-General. Details of the principles and signatories, which include Australian fund managers, are available at