More and more people are asking about ethical investment or socially responsible investment (SRI) when discussing the makeup of both their superannuation and non-superannuation portfolios. This is especially true of the younger demographics.
It’s clear that some investors are concerned about more than just profit margins, but what are the positives and negatives of investing ethical or SRI companies?
The positives:
- Feel good factor. Provided the companies you’re investing in share your values, then you may feel you are helping play your part in changing the world for the better. If the companies deliver good returns then you’ll have the added bonus of benefiting financially from your values
- Driving change. As more socially responsible projects and businesses are backed by investors, other companies will look to improve their ethical behaviours in order to attract funding. This can only be a positive for the environment and other meaningful social causes
- Potential for future profit. Socially responsible firms are likely to see improved profits as consumer behaviour shifts towards more ethically driven purchases. Nielsen statistics indicate that nearly three-quarters of millennials would pay a surcharge for environmentally goods and services.
- Socially driven management can result in improved profits through a more engaged workforce. The ethics and sense of social responsibility that makes us feel good about investing in SRI businesses can mean a more engaged workforce. In turn this can provide greater employee output resulting in higher profits for the company.
The negatives:
- The definition of Ethical. You’ll need to decide what you feel is ethical or responsible and then invest in businesses that meet those guidelines. It can be difficult to find an exact match though. For instance, you may not wish to have any exposure at all to a SRI fund includes companies involved in tobacco manufacture but the fund might have a tolerance of 10% when it comes to such activities. Do you give the fund a miss or do you compromise?
- Time and research. Ethical investing isn’t a passive strategy and you will have to spend time researching potential investments to ensure they align with your values. If every investment in your portfolio must meet certain criteria it can become quite complex.
- Higher fees. Due to the additional research and filters attached to SRI the fees can often be higher. Higher fees can eat into the returns of your portfolio and therefore underperform more traditional investments
- Often not an optimal strategy. It’s unlikely that an Ethical or SRI strategy will provide optimal returns as large parts of the investment markets are not included. You could be sacrificing financial gains by following an ethical approach.
Like every decision we make, there are pros and cons to be considered. Ethical investing may not be the right choice for everyone but it may be a more satisfying strategy for those who want their portfolios to better reflect their social and moral beliefs.
If you would like to discuss your options in detail start a conversation with us today.
Post by Steve May
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
