How we supported a family with $60m build, protect & preserve their legacy,

whilst overlaying their Ethical & Socially Responsible Investing views.

How do you make money & feel good about doing it?

Deciding how to invest your money is a complicated business. There are many factors to consider, such as risk and return, taxes, inflation, dividends, and diversification. Just figuring out how to get the best return on your money takes a lot of thought and planning.

Yet there are many investors who are becoming more financially literate and are taking more interest on where their money is invested, both personally and in superannuation. With many Australians taking a deeper look into their investments to determine if they are comfortable with how they growing their wealth.

There is more to investing than just dollars and rates of return. With many wishing to ensure that their investments aren’t supporting activities that are counter-intuitive to their values.

What is Ethical & Socially Responsible investing (SRI)?
Definitions of Ethical & Socially Responsible Investing are wide ranging. The inherently subjective nature can make these factors hard to quantify.

Ethical & Socially Responsible investing is about considering factors that are important to YOU when deciding where to invest your money. These might be environmental, social, corporate governance and/or ethical factors, in addition to financial return. Also known as sustainable or ethical investing, it favours investments in organisations that reduce, or do not contribute to, negative environmental and social impacts, and excludes those not aligned with a sustainable approach. Ethical investment is about knowing what your investments are funding, and choosing where to invest, based on this knowledge and your personal values.

Socially responsible investments include avoid investments in companies that produce or sell addictive substances (like alcohol, gambling, and tobacco) in favour of seeking out companies that are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.

There are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily have to go hand in hand; just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return, and the promise of a good return is far from an assurance that the nature of the company involved is socially conscious. An investor must still assess the financial outlook of the investment while trying to gauge its social value.

Understanding Ethical & Socially Responsible Investing

The essence of Ethical & Socially Responsible Investing is choosing investments that are in line with your values. However, those values aren’t the same for all investors.

Socially responsible investors choose their investments to promote a variety of different goals, including (but not limited to) the following:

• Cleaner Environment. “Green” investors prefer companies that don’t pollute the environment. Some refuse to invest in fossil fuels, while others look for companies that minimise the carbon footprint of their products and services. In addition, it may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.

• Social Justice. Some investors refuse to do business in countries with a record of human rights violations. Others look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

  This includes the recent breaches of a number of large organisations in Australia that have been found guilty of underpaying staff for a number of years.

• Governance. Investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don't use political contributions to obtain unduly favourable treatment and, of course, don't engage in illegal practices.

• Promoting Peace. Peace investors won’t invest in war in any way. They avoid all companies that make weapons or profit from conflict in foreign countries. This even includes banks and financial institutions that lend money to these companies.

• Promoting Health. Many socially responsible investors refuse to invest in companies that sell tobacco or alcohol. Others refuse to invest in products that they think pose a threat to human health, such as genetically modified organisms. Since some of these products can also be seen as threats to the environment, this category overlaps with green investing.

• Promoting Morality. Avoiding the ‘sin industries’. Different investors see this category as including different types of enterprises, such as liquor, gambling, pornography, and contraception.

Although many of these issues are popular with the political left, SRI isn’t defined by politics.

Both the liberal who refuses to invest in companies that make weapons and the conservative who refuses to invest in hospitals that perform abortions are considered to be socially responsible investors – they just choose their investments based on different standards.

How we helped build an Ethical & Socially Responsible Investment Portfolio

As there are many investment firms that claim they are:

• “ethically investing”,

• “socially responsible investing (SRI)”

• “Environmental, Socially, Governance Investing (ESG)”

It comes down to your individual views & values.

There are two main reasons Ethically & Socially Responsible investors seek a new advisor

1. Existing advisor does not listen

2. Existing advisor is lazy

Two extremely damaging and concerning claims.

However, when you dive deeper, you can completely understand on where the investor is coming from.

The existing adviser does not listen, stems from their views & values not being reflected in how they money is managed and invested.

This seems strange, given that most Ethically & Socially Responsible investors let their advisor know their views & values at the start of their relationship.

Generally they set boundaries on what they don’t want to be involved with and where they want there money invested.

However, it boils down to the second point. My advisor is lazy.

In my experience, many Ethically & Socially Responsible investors are financially educated and are financial literate. With this in mind, these investors view the actions of an advisor investing a large proportion of their monies in to a small number of “Ethical”, “Green”, “SRI”, “ESG” managed funds or Exchange Traded (ETFs) lazy.

This is because these investments generally hold similar underlying stocks, increasing the portfolios exposure to single companies, whilst deceasing the overall diversification which results in an increased portfolio risk.

Financial literate investors see straight through this and wonder why they are paying top dollar for this poor advice & portfolio construction.

That being said, the Ethical & Socially Responsible Investment universe is still relatively new. We saw our first client in 2009.

There father was a trucking logistics businessman, who made his wealth over 70 years.

He passed away, with his adult children inheriting his $60m wealth.

They had very different investment views & values comparative to their father.

We sat down with the three of them individually & then together to get a better understanding of their views & values, before agreeing on an investment mandate that looked at supporting them.

This mandate included building, protecting & preserving their family legacy, whilst overlaying their Ethical & Socially Responsible views & values to investing their monies.

We had over 63 different filters that were applied to the investment universe, before we assessed each investment & company on their fundamentals.

With this in mind, we noted that our hours, value and cost to serve this family were significant, given the complexity of the investment service mandate.

Why Choose Socially Responsible Investments?

Choosing socially responsible investments can have both personal and 'bigger picture' benefits such as: investing in line with personal values, financial returns, facilitating social change as businesses alter their practices to attract your investment.

Investors should keep in mind that ethical & socially responsible investments are still investments, and be sure to weigh the potential for return into their decisions.

If you are looking for an expert financial advisor that specialises in Ethical & Social Responsible Investments, contact our Newcastle & Lake Macquarie Financial Planning Advisers (you no longer need to take your business to Sydney).

Links

The following pages provide further information for your perusal.

What is a Socially Responsible Investment (SRI) - https://www.investopedia.com/terms/s/sri.asp

ESG, SRI & Impact Investing: What’s the difference - https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/

SRI Vs ESG: What’s the difference? - https://finance.yahoo.com/news/sri-vs-esg-difference-151633076.html

Your complete guide to investing with a conscience - https://www.cnbc.com/2019/12/14/your-complete-guide-to-socially-responsible-investing.html

A beginner’s guide to socially responsible investing - https://www.forbes.com/sites/forbesfinancecouncil/2019/12/26/a-beginners-guide-to-socially-responsible-investing/?sh=6bb8a3cf4862