When it comes to investing, financial factors have traditionally dominated decision making. These days' investors increasingly want to meet ethical hurdles as well as generate returns, but sometimes it's easier said than done.
An investor can start by crossing companies involved in things like arms manufacturing, tobacco, gambling and alcohol off the list of potential holdings. These are usually quite easy to identify. From there, sustainable investors try to identify companies in legitimate industries that are excessive polluters, have substandard labour practices, or similar concerns.
On the other side of the coin, positive screening can unearth companies that actively pursue sustainable business practices, or have positive social impacts. This could mean everything from alternative energy businesses, water desalination companies or technology companies with a minimal carbon footprint.
From there it gets much more difficult though, and highly subjective. There are very few businesses anywhere that will come through a socially responsible evaluation process with a faultless record.
Take supermarket giant Woolworths, for example. While the main operation might not offend too many people, being one of the largest alcohol retailers and pokie machine owners in Australia could.
Even some of our own cleanest and greenest might come up short under extremely stringent measures. Meridian Energy and TrustPower produce energy solely from hydro and wind generation, making them great candidates for a sustainable portfolio. But there are still numerous negative environmental impacts associated with those huge hydro dams and 100m tall windmills.
At the other end of the scale, Fletcher Building might not seem the most sustainable business with all its construction and manufacturing. However, the company has an annual sustainability plan to minimise waste, increase energy-efficiency and use recycled raw materials where possible.
Deciding exactly what fits the definition of socially responsible is one of the biggest challenges of ethical investing, and there is no right answer. Some of us will want to exclude entire industries, while others might be happy if companies are doing more than required to minimise any impacts.
There's also the question of whether socially responsible investors get the same returns as those investing purely on the basis of financials. One would think limiting your options puts you at a disadvantage, at least in the short-term. Most sustainable share indices have indeed fallen short of the broader markets over the last decade.
However, hopefully those organisations embracing a best-practice approach to environmental, social and governance factors will ultimately rise above those taking a less responsible, shorter-term attitude. Many investors might also be happy to accept lower returns for investing is a more sustainable, ethical manner.
There are many ways to put this into practice, including a handful of KiwiSaver funds that invest in such a way. Even among these I'm willing to bet there are some differences approaches taking place.
These issues are certainly something we should take note of when deciding who deserves our hard-earned capital, and a balance between the two extremes is probably about right for most people.
Disclosure of interest: Craigs Investment Partners operates a Socially Responsible KiwiSaver fund.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. His disclosure statement is available on www.craigsip.com. This column should not be regarded as personalised investment advice.