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Peeling back the layers of ethical investing

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Commonly used terms for ethical investing include responsible investing or impact investing. I personally simply refer to it as smart long-term investing. Forget about green ideologies or moral righteousness for a minute and only focus on one thing: the future.

Benjamin Graham pointed out in his book “The Intelligent Investor” that you must be a believer in a better tomorrow – the future - in order to be an investor.

What will the world be like in ten or twenty years’ time? What food are we going to eat, what technology are we going to use and what will transportation look like? It’s 2018 and we still don’t have the flying cars or self-lacing shoes that were predicted in Back to the Future Part II in 1989. Frankly, we don’t know exactly what the future will look like.

The only constant is change. It is estimated that about half of all Fortune 500 companies will disappear over the coming decade as new technologies disrupt sectors and existing structures. This process is Darwinian in nature and could be referred as ‘the natural selection in economics’ or ‘survival of the fittest companies’.  

The key for a company to ‘survive’ is the quality and relevance of its product, its ability to adopt to a changing landscape as well as the basic supply and demand dynamics of modern economics. Businesses that are desperately holding onto outdated practices or products will simply not make the cut.

Going one step further – the second layer - companies with unethical business practices or weak corporate governance won’t make the cut either. These businesses might be in the spotlight for a short period, but certainly not over the long-term, especially not in a time when public awareness for sustainability continues to rise.

Ethics: an essential ingredient in economics

The ‘natural selection’ process of economics punishes companies that aren’t responding to consumer trends and there is a clear trend for consumers to make ethically conscious decisions. In this day and age, consumers care how their shoes are manufactured and how their power is generated. In short, the conscious consumer of 2018 values sustainability more than ever.

As this trend matures, sustainability will become a key focus for companies and entire economies in an attempt to remain competitive. The growing trend of ethical capitalism, as I like to call it, will continue to change the economic landscape and impact the way we invest. Ten years ago, being ethical offered a competitive advantage, soon it will be a necessity.

It makes no sense not investing in ethics

I want my investment portfolio to consist of companies that I believe will still exist in five to ten years.

So why would you want to invest in a company that might be considered ‘unethical’? Well the simple answer is to generate a superior return – often the main reason why anyone would invest in the first place. But should you sacrifice your morals and values just to generate a return at all cost? The good news is you don’t have to, but it’s not always as black and white as it seems and that’s where it gets tricky.
 

It makes no sense not investing in ethics

I want my investment portfolio to consist of companies that I believe will still exist in five to ten years.

So why would you want to invest in a company that might be considered ‘unethical’? Well the simple answer is to generate a superior return – often the main reason why anyone would invest in the first place. But should you sacrifice your morals and values just to generate a return at all cost? The good news is you don’t have to, but it’s not always as black and white as it seems and that’s where it gets tricky.
 

Ask yourself: Am I backing the wrong horse?

Opponents of ethical investing claim that you sacrifice returns by investing in responsibly managed, long-term focused companies. The reality is, this statement is not true. Some fund managers outperform, others underperform – there is no conclusive evidence that a particular ‘style’ delivers superior returns. It comes down to the investment methodology of the investment manager as well countless other factors that have filled entire books and are certainly beyond the scope of this article. But there is certainly no shortage of ‘good’ companies to choose from. Tragically, sometimes you don’t even know that you are backing the wrong horse as the recent tragedy of Big Un Limited (BIG) has revealed.

Investing in sustainable and ethical companies offers plenty of compelling investment opportunities, and furthermore it is my firm belief that weak corporate governance and unethical practices will eventually destroy value. The recent case of AMP Limited (AMP) is a great example of how things can turn ugly very quickly.

Sooner or later the day of reckoning will come for all companies that fail to respond to consumers trends. Do you think investors and consumers will continue to back up environmental polluters in 10 years’ time even if there are more sustainable cost effective alternatives with a much smaller economic footprint? You tell me.

I have come to the opinion that investing ethically means very little unless you actually spend some time figuring out what it means to you. The term ethical investing is somewhat worn out and often abused for marketing purposes, but I encourage everyone to carefully think about your investment choices as your money has the power to finance change.

Simon Herrmann is an equity analyst at Wise-owl. This information was produced by wise-owl.com Pty Ltd (ACN 097 446 369), which is an Australian financial services licensee (Licence no. 246670). The views in this article are current as at 26 July 2018. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.