OPINION: I have always thought socially responsible investing makes good sense. As such, I have excluded “sin” stocks from my own portfolio: for example, I recognise the harm that gambling does, so even though Sky City appears to be a well governed and managed company, I have never invested.
The chances are that refusing to invest in Sky City has cost me some investment profits, but if that is the case, so be it.
The idea of doing good with your investments (or at least doing no harm with them) has been around for a long time. In recent years however, it has joined the mainstream.
Another related idea has also come on stream for investors: Environment, Social, Governance (ESG) investment practice. This means assessing any prospective investment in terms of its environmental effect, its social practises and its governance.
The idea of this assessment is to some extent about excluding “sin” stocks, but just as important, trying to find businesses to invest in that are likely to be sustainable.
This assessment using an ESG framework can mean investment profit as well as doing good. A sustainable company is one likely to be around and generating profits for a long time, making it a better investment than one that is going to founder because of its poor practices.
ESG assessments make business sense. The companies doing them well are likely to prosper and make the best investments.
ESG investment practice means analysing a company in terms of three things. First, its impact on the environment – a sustainable company that will last into the future is not likely to do great environmental damage.
Companies wasteful of resources like water, or which are heavy users of carbon, probably won’t make good investments. At some point, they will be penalised for their wastefulness and ultimately that will affect profitability and probably, the company’s sustainability.
Second, is a social analysis – how good or otherwise is a company’s relationship with its employees, its customers, the community and other stakeholders? This is an assessment of how well the company treats the people both within and outside it. Again, a sustainable company that will thrive in the long-term is like to have good standing with its wide community.
Third is governance, which involves considering things like whether the Board of the company has good governance structures and processes, manages conflicts of interest, has good gender balance and staff conduct is ethical.
An ESG analysis will probably see an investor exclude some stocks. But it will also see the same investor include stocks that perform well on an ESG analysis and perform well as investments.
As such, ESG helps both value-motivated investors (those who want to buy good value investments) and values-motivated investors (those who want their investment capital to do good in the world). This really is an area where you can both have your cake and eat it too.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.