By Gillian Bullock, Money website
If Al Gore's An Inconvenient Truth raised your awareness about the sustainability of the planet, then maybe it's time you applied some of what you gleaned to your investments.
With more than 80 managed funds in Australia purporting to support sustainable investing, managing more than $4.1 billion between them, there appears to be a fair amount of choice.
There has been some criticism, however, of the companies in which ethical funds invest. For instance, many funds rank the likes of BHP Billiton among their investments. Clearly, investing in a firm involved in uranium mining may not sit comfortably with the pursuit of sustainability.
A study by Australian Financial Review journalist Jonathan Barrett found that many funds have almost identical companies in their so-called ethical or sustainable product as in their flagship fund. And that includes BHP Billiton.
However, Australia's longest-running ethical fund Hunter Hall and Australian Ethical do not include BHP Billiton in their portfolios.
If you invest in one of the funds that mirror mainstream funds, it begs the question, just what is the point of investing in a sustainable fund and paying higher management fees when there is virtually no difference between these investments and those of standard funds nor is there much difference in their return.
Ratings group Morningstar looked at the returns for ethical funds for one, three and five years up to January 31, 2007. Ethical retail share funds only outperformed non-ethical retail share funds for the one-year period, coming in at 22.84 percent versus 20.12 percent.
For the three-year period, ethical funds returned 23.07 percent compared with 23.94 for non-ethical and for five years they were 14.03 percent versus 14.44 per cent.
Such close performances reflect how the make-up of so many sustainable funds echoes those of mainstream funds, but investors are paying on average 1.92 percent in ongoing fees for an ethical fund and only 1.87 percent for a mainstream fund.
So would you not be better off investing directly in companies on the stock market and thus more accurately reflecting your own interpretation of sustainable investments?
Anne O'Donnell, chief executive officer with Australian Ethical, says it is difficult for the average retail investor to choose individual stocks "unless they have a lot of knowledge".
This view is echoed by Louise O'Halloran, executive director of the Ethical Investment Association, who says it is hard for individuals to have that depth of knowledge. O'Halloran also counters Barrett's criticism by saying a lot of big companies would support a corporate and social responsibility program so it does not surprise her that many of the companies are the same.
She says that if you drilled down to smaller companies in the funds, it might paint a different picture.
According to O'Halloran, ethical funds would conduct "deep analysis of anywhere between 100 and 200 issues which relate to a company's governance performance and its impacts on environment and its impacts on the environment and society". Australia is now a recognised as a world leader in the delivery of quality ethical and sustainable investments, not least because it has a consumer certification process in place — a world first.
Jack Lowenstein, deputy chairman of Hunter Hall, which holds the lion's share of ethical fund investments, with upwards of $1.6 billion under management, says his company uses negative screening which would preclude investments in uranium, armaments, tobacco, gambling and those companies that damage the environment. However, this does not mean Hunter Hall avoids all mining companies.
If you are thinking about investing in an ethical fund, make sure you understand just what criteria the fund uses in its research and that their values are aligned with your own.
