Ethical and social investing: A winner or gimmick?

In an ideal world, companies would care about people as much as profits.

They would pay and treat their employees and customers fairly, be honest and transparent with them, deliver only products and services that were beneficial to people and the planet, and pay taxes relative to profits.

I did say ideal. As a spate of recent banking and financial planning scandals has proven, far-too-often the reverse is true.

And so when companies claim to be "socially responsible" or "ethically responsible" while simultaneously hurting their staff and customers, the media and public are rightly sceptical.

Practice what you preach

As we move into an area where technology and new forms of media give citizens more opportunity to voice outrage against immoral and unjust behaviour - recall how Starbucks once moved to pay additional taxes after public outcry - companies will need to actually practice the responsible behaviour they preach.

While some area already starting to, part of the problem in gauging how "responsible" a company is that there's a plethora of different concepts and criteria used to judge them.

Corporate social responsibility, social investing, ethical investing, impact investing, ESG ((environmental, social, governance): they're the latest buzzwords in a move towards companies and funds that want to be seen as good citizens.

But they are not all exactly the same thing. And the responsible investing market isn't a mainstream or mature one.

Starbucks released a unicorn frappuccino but is it a great corporate citizen?

Starbucks released a unicorn frappuccino but is it a great corporate citizen? Photo: Starbucks

Need for clear benchmarks

There needs to be clearer benchmarks set about what actually constitutes socially responsible or ethically responsible business and investing. It may end up being a role for governments and regulators globally.

Many of the nation's largest companies - take for example Woolworths and Wesfarmers - don't meet responsible guidelines because of their gaming businesses.

Investors also need to take a cautious approach and carefully assess the long-term profitability of new funds springing up. Doing what's right and moral, and simultaneously maximising financial returns, is a tricky feat.

Investment guru Geoff Wilson this week reported his two Future Generation funds have announced a combined investment of $6.8 million in Australian charities to be paid this month. It's a good news story, but the funds are relatively new. Their long-term success isn't guaranteed.

Geoff Wilson's Future Generation funds aim to help charities but will there be long-term profitability for investors?

Geoff Wilson's Future Generation funds aim to help charities but will there be long-term profitability for investors? Photo: Daniel Munoz

Popularity grows

In the meantime, media rely on measurements by peak bodies representing the businesses that claim to be "responsible" such as the Responsible Investment Association Australasia.

It delivers an annual Benchmark Report. Its latest one found 70 per cent of the largest-50 super funds had some level of commitment to "responsible investment". Responsible investment funds have more than quadrupled over the past three years to $622 billion, its report said.

Nearly half (44 per cent) of Australia's assets under management now being invested through some form of responsible investment strategy. These included, "negative screening", "impact investing", "sustainability themed funds" and the integration of "ESG considerations".

Assuming you accept the association's criteria of "responsible" investment", it said these funds are outperforming their average mainstream counterparts.

Challenges remain

Treasurer Scott Morrison has thrown $30 million in funds behind the idea of social impact investing.

Treasurer Scott Morrison has thrown $30 million in funds behind social impacting investing.

Treasurer Scott Morrison has thrown $30 million in funds behind social impacting investing. Photo: AAP

But as a Treasury paper has noted, despite considerable private sector interest, big challenges remain.

Among these include that such investments "are generally small-scale, bespoke and illiquid".

Treasury's paper also noted other problems: high due-diligence costs for investors and intermediaries, few mainstream advisers or wealth managers willing to give advice, and high transaction costs of deals, often driven by the need to use specialist lawyers and finance professionals to establish the projects.

No panacea

Social investing isn't a panacea. Not all social problems could or should be targeted through social impact investment, Treasury's paper said.

And for those that can be, there's often a "lack of accessible, high quality data to measure outcomes to determine the level of success (and payment) for particular social impact investment projects".

There's also "limited capacity in the community sector to deliver projects", and "difficulty in clearly articulating and agreeing to social outcome measures", it said.

Until globally accepted benchmarks and genuine structures for responsible business practices and investing are developed - this movement, while doing some good on the ground - will have limited impact in tackling inequality and improving social outcomes for all.

Follow Nassim Khadem on Facebook and Twitter.

The story Ethical and social investing: A winner or gimmick? first appeared on The Sydney Morning Herald.

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