How we choose investments
How hard could it be for an ethical investor to tell the difference between good and bad companies? Simply replying that ‘it’s complicated’ is sure to encourage scepticism. Here, we outline our process for choosing the ethical companies we invest in.
The ethics
We’ve had the same clear starting point for our investment decisions since the company began in 1986 – our Australian Ethical Charter. The Charter (summarised below, or see the full version here: www.australianethical.com.au/australian-ethical-charter) lists 12 things we will support and 11 harms we will avoid when investing.
The Charter is worth a read for those who worry that core ethical principles are volatile, inconstant things. Thirty years on, the Charter principles still resonate strongly with most who read them today; it supports such things as sustainable food production, endangered eco-systems and the alleviation of poverty, and avoids harms such as waste mismanagement, militarism and discrimination. Boiling it down, the Charter guides us in how we can best help people, animals and the environment and avoid causing unnecessary harm.
What we like
The first question we ask is whether a company’s activities support one or more Charter ‘positives’ – a prerequisite for investment by us. This guides us to companies operating in areas such as clean energy, sustainable products, medical solutions, innovative technologies, responsible banking, healthcare, aged care, recycling, and energy efficiency. This type of ethical investing focusses on areas of the economy which through their positive impact have strong long-term growth potential.
What we don’t like
After looking at the positives, we examine the negative impacts of a company’s activities. There are some ‘no-go’ areas which will automatically rule out investment, such as manufacturing weapons or cigarettes. But there are also things that although we don’t like we may tolerate if they are a small part of the company’s business or if they are a necessary side-effect of a positive activity of the company. This is where things can become complicated, so we’ll illustrate with a case study example (see below).
Opening the floodgates?
Sometimes people worry that by balancing a company’s positive and negative impacts, we could open the floodgates to all sorts of questionable companies. This is a valid concern, and we recommend that investors conduct a reality check when looking at any ethical investment option, by comparing the investments of that option compared to the investments of a ‘mainstream fund’. As one indicator of the rigour of our process, we assess only about 30% of the ASX top 200 companies to be acceptable for investment under our Charter. That’s a lot of things we won’t invest in.
You might still think we should be even more restrictive, and only invest in companies which are ‘completely ethical’. Our experience is that just as perfect people are rare, so are perfect companies. In some cases we believe we can best advance the ethical purpose of our Charter by remaining invested and engaging with an imperfect company, because we believe the company is overall making a positive contribution and that this contribution can be enhanced by engagement to help drive continuous improvement.
The financial decision
It’s important to remember that after ‘passing the Ethical Charter’, we still need to investigate the financial investment merits of the company. Just as we won’t trade off our ethics for financial performance, we also have a responsibility to ensure that we invest only in companies where we positively assess their capacity to generate long-term value for members and investors.
