Does ethical investing stack up?

A recent survey highlighted that over three-quarters of New Zealanders expect their KiwiSaver investment funds to be managed responsibly and ethically.¹ Yet 59% of Kiwis would consider investing ethically only if the returns were as good as a non-ethical fund.²

There’s still a widely held perception that ethical investment funds don’t perform as well as non-ethical funds. There are many factors that influence a fund’s performance, not just if the fund avoids investing in ‘sin-stocks’ or not.

So, how does avoiding certain industries, such as fossil fuels, lead to better performance in an investment fund?

Firstly… what is ethical investing?

There’s lots of terms used across the industry to describe the concept of ‘ethical investing’. You might have heard it referred to by other terms such as responsible investing, ESG investing, sustainable investing or even socially responsible investing (SRI).

Essentially, they’re all elements of the same concept. Broadly speaking, ‘ethical investing’ is choosing to invest in a fund that aligns with your personal values. If you want to avoid investing in industries that you don’t agree with or feel cause harm to society or the environment, investing in an ethical fund is a way to ensure your money doesn’t end up supporting those industries.

Typically, companies would be evaluated on a range of financial and non-financial criteria, including Environmental, Social and Governance (ESG) factors:

1. Environmental – how the company’s operations impact the environment
2. Social – how the company treats its employees, suppliers and customers
3. Governance – how the company’s structure, diversity of leadership and relationship with shareholders influence its commercial value

How the fund treats these factors will depend on the fund’s overall philosophy and investment objectives.

Negative screening

The process of choosing what companies to exclude from an ethical investment fund is called ‘negative screening’. This approach is generally used by socially responsible investment (SRI) funds.

SRI funds typically use a negative screen to avoid investing a range of controversial industries such as fossil fuels or nuclear power; activities that cause harm such as alcohol, gambling or adult entertainment; or unethical behaviors such as human rights violations or animal cruelty.

Our SRI funds avoid investing these specific industries:

• Fossil fuels

• Nuclear power production

• Military weapons manufacturing

• Civilian firearms production

• Tobacco production

• Alcohol production

• Gambling operations

• Adult entertainment

• Genetically modified organisms

So, excluding companies would mean less returns, right?

Not quite! Just because companies aren’t included, it doesn’t necessarily mean that returns are lost as a result. Nor does choosing to invest in a good business necessarily mean better returns.

For example, many standard investment funds hold investments in oil. The oil price drop in March 2020 saw the value of investments in oil drop significantly, which would have contributed to lower returns for many funds with oil holdings.

Even though there was an initial drop in value, Booster’s SRI funds held up relatively well during the same time compared to other funds – as the SRI funds exclude investments in oil.

Of course, it can also work in reverse. The markets for seemingly controversial industries such as oil, nuclear power production and other ‘sin-stocks’ may have a good run, where investments in ‘ethical’ companies may be adversely affected by market-specific forces.

But does ethical investing stack up?

The good news is that Booster’s SRI funds (KiwiSaver) are proving that investing ethically and getting good returns aren’t mutually exclusive.

Booster’s SRI Balanced Fund returned 8.5% p.a. over the 5 years to 30 September 2020 (which is the 3rd highest Balanced Fund in Morningstar’s KiwiSaver survey) whilst our SRI High Growth Fund returned 11.6% p.a. (ranking 2nd highest in Morningstar’s Aggressive category) in the same period.

Both funds were also ranked #1 in their categories over the past three years in Morningstar’s KiwiSaver Survey.^{3 4}

Booster’s SRI High Growth Fund has continued to perform strongly during the ongoing market challenges in 2020. As at 31 October 2020, Booster’s SRI High Growth Fund’s annual return is 11.63%, compared to Booster’s High Growth Fund’s annual return of 6.81%.⁴

This just goes to show that investing in socially responsible investment funds still stacks up when the world’s looking a bit grim.

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¹Responsible Investment – New Zealand Survey 2020, Q6
²Responsible Investment – New Zealand Survey 2020, Q17
³Morningstar KiwiSaver Survey September Quarter 2020
⁴Returns are net of fees (excluding the member fee and any withdrawal fee) and before tax

Past returns are no indication of future returns. We recommend you obtain financial advice before making any financial decisions.