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The challenges of investing responsibly

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Socially responsible investing may have started out as a greenie fad but it has grown into a movement with building momentum. Now, it is hard to argue with, and why would you want to?

Investing ‘responsibly’ is what most investors would say they do.

Environmental, social and governance issues (ESG) are underlying factors most professional investors now consider and integrate when determining their asset allocations.

And these principles sell well to savers and investors, as well as to trustees and investment committee members. Everyone is on board.

But you don’t have to scratch very far below the surface to find some very tricky questions. Grappling with them often becomes quite political.

The focus is squarely on responsible investing. But greenwashing is rife and the sales pitches are strong. It is a topic so broad that it can be made to cover every view. And therein lies trouble.

Traditional mandates involved getting the best sustainable return for the primary beneficiaries. It was tied up in the principles of fiduciary responsibility. The manager’s personal standards of ‘morality’ were essentially set aside for the mandated objective that was usually about financial risk.

But the tide has turned, and judgements about ethics and morality are now very much to the fore, even if they are codified into new mandates.

To give you a taste of the issues involved, consider the Danish company Ørsted. It was once one of the most coal-intensive energy companies in Europe. Today, they claim to be the world’s most sustainable energy company, and a global leader in the transition to green energy. This is arguably where capital should be directed by responsible investors – but they would have appeared on many exclusion lists because of their history.

There are many other ethical issues to be struggled with and most can’t be answered satisfactorily – they are essentially personal preferences and deeply political.

Do you want to turn your lights on at night? You probably do, but that will depend on mining, chemistry, global supply chains, and complex manufacturing systems with parts sourced from countries you may not wish to deal with. If your responsible investing funds avoid these sorts of industries, you are just relying on others to provide the capital for those activities, and happy that they do so your night-switch works reliably.

Do you need a competitive return on your socially responsible funds? The sales pitch will be that you don’t need to compromise on that. But those essential industries you avoid will now deliver goods with higher prices (and probably better returns) because you shunned them. And those that don’t have the disposable income you do (because you are an investor) will pay more for their goods because of the collective choices of many ‘responsible’ investors. Ethical choices may be a benefit and cost you can afford that others find a burden.

However, just because there are difficult judgments and choices to be made doesn’t mean you should avoid them. You just need to commit to making them properly.

To be ‘responsible’ in the widest sense really means more than just passively choosing funds that self-market they are ‘responsible’ or have paid to have the green-tick ESG shields in their marketing materials. To be genuinely ‘responsible’ you need to be an active investor, prepared to find and download the fund’s investment documents and compare them to the standards you wish to adopt. But how do you do that?

Interest.co.nz has teamed up with Research IP to make available their RIPPL Effect Reports for over 300 separate funds. These easy to read reviews are each in a standard format, and enable you to find the same information about each fund or company.

This resource is being built out progressively, and we have recently launched over 200 KiwiSaver and non-KiwiSaver RIPPL Effect reports and you can find them starting here. Our menu navigation to this new extensive resource is here:

Also today, you can read Research IP’s 38 page paper on the topic, Beneath the Surface of Responsible Investing, which highlights the many different ways to think about the topic. (Registration required.)

Download it here.