Tuesday, September 2, 2014

Making Your Super Socially Responsible

Since 2005, most have been able to decide where the money contributed to their superannuation by their employer will be invested. Generally, people look to investments with high returns.  There are other factors that should be considered when investing your money, which is where socially responsible investing (or SRI) comes into the picture.  Socially responsible investing takes into consideration the impact our investments have on the planet and society at large.  While myths float around that SRI can't beat traditional investments, the numbers tell a very different story.

Why Should I Consider Socially Responsible Investing?

Our investments don't just impact our retirement; they impact the future of the world.  When we invest in a company, we are endorsing and funding the way they do business.  In 2013, a garment manufacturing building in Bangladesh collapsed.  As a result of the unsafe work conditions, 1,100 workers died.  When we were buying clothing and investing our money in companies that had their clothing made in this building and others like it, we were endorsing the continuance of these work conditions, and ultimately had an indirect hand in over 1,000 people's deaths.

Our planet is changing rapidly as our fossil fuel consumption releases carbon dioxide and other carbon compounds into the atmosphere.  These changes are not for the good.  But when we invest in companies that are trying to change how we obtain and use energy, we are using our dollars to change the future.  Hopefully we are able to do it quickly and efficiently enough to save this blue orb we call Earth from destruction.

Some of the most popular issues driving SRI are unsustainable consumption, global population, health care, emerging markets, developing markets, and, of course, climate change.

The Myth of Underperforming SRI Investments

There is a commonly-held belief that SRI investments underperform when compared to other investments.  Data shows us that this is an erroneous myth.  Many studies have been done proving that SRI investments keep pace with non-SRI investments, and in some cases even outperform them.  According to Responsible Investment Association Australia, core responsible investment Australian equities funds have outperformed the ASX 300 index over 1, 3, 5 and 10 years.  Core SRI international equities funds and balanced funds have had similar sucess, with the former outperforming over 5 and 10 years, and the latter outperforming over 1, 5 and 10.  More supporting data can be found in this Griffith University paper, which uses the Markov regime switching model and measures efficiency on a weekly basis.  It also notes that the SRI sector performs much like the equity market at large; the US SRI market heavily impacts Australian investors, much as the US equity market heavily impacts non-SRI Australian investors.

It's worth checking to see if your super offers a responsible investing option through managed funds, industry funds, or master trusts.  Many do, but if yours doesn't, let those in charge know that you'd like to see that change.  Just a few people expressing pressing interest can truly make a change in this field.

Terms to Familiarize Yourself With

ESG- Environmental, social and governance.  You will often see this term used as an adjective to "considerations" when building your investments through your super.  It may also be couple with "ethical considerations."
Negative Screening-When you run a negative screen on investments in SRI, your are looking at them to see what you don't want.  For example, if a company participates in unsustainable forestry, it will not pass a negative screen and therefore be left out of SRI funds that are concerned with this issue.
Positive Screening-When you run a positive screen, you are looking for companies to invest in that are doing things that you want to promote.  Perhaps you are screening for companies that have made major innovations in using sustainable energy.  They will pass a positive screen and you will be investing in something that changes the future for the better.
Best Of Sector-This approach uses only positive screening, and includes exposure to all sectors of the economy.
Thematic Investing-Again, this approach uses a positive screen, but it is concerned with only one, specific area of SRI.  One example would be funds that only concern themselves with human rights issues.
RIAA-Respsonisble Investment Association Australia (or RIAA) provides further education on SRI issues as they apply to Australians.  They do yearly reports on the sector, along with providing certification to asset managers and financial advisers who work with SRI products.

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