Martin Hawes: Investing in ethics

Socially responsible investors can put their money where their morals are. Photo / Peter Meecham

Opinion

The idea of improving the world by investing has been around for a long time but in this country it has never really caught on.

It seems the two main reasons for this are that there is no clear idea on how to invest responsibly, and there is also a fear that by adopting a responsible investment strategy, returns will be lower.

The idea of socially responsible investment (SRI) will differ from person to person - we all have different ideas of right and wrong. For example, I have never invested in Sky City (I have seen the effects of gambling and am not going to support that industry) while other people may be uncomfortable investing in mining (which I am happy to invest in).

There could be some agreement regarding certain industries (eg, tobacco, armaments) but there will far less common ground on others (eg, nuclear power, liquor).

It can get much more complicated: some companies use child labour and others exploit animals. How do we know that this is happening and, even if we do know, whether it is right or wrong (in some countries, work for children may seem like an opportunity and testing on animals may save human lives)?

Moreover, what about otherwise "good" companies who deal with "bad" companies - do we refuse to invest in banks that lend to tobacco companies?

The whole area is so fraught that many people do not even try to make their investment do good.

The second big reason some ignore SRI is because doing good possibly comes at a price. I have seen many studies comparing SRI with investment strategies where anything goes. These have not given a clear-cut picture - some studies show SRI outperforming, some show underperformance.

My view is that investing responsibly means there are fewer options and you are therefore most likely going to miss out on some higher-performing companies. I could not quantify this but there is likely to be some cost to SRI.

I think that we sometimes over-complicate things. We want to make our investment strategy do some good but the difficulties tend to make us give up on the whole idea.

I think that this is a great shame. At the very least, investors should be thinking about what they invest in, avoiding the things that are obviously poor and preferably investigating the companies they do put their money into.

Going further than this, there are many managed funds for responsible investors. Some of these promise to invest only in ethical investments while others take a more activist approach, buying into "bad" companies and then agitating on the inside for change.

By investing in these funds you can do the financial equivalent of putting your money where your mouth is.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com