Originally published in The Australian, June 15 2018
JAMES KIRBY THE DEAL
In the context of a royal commission that has hung financial advisers out to dry, it’s a brave operator who actually straps themselves to the mast and publicly identifies as an “ethical financial adviser”.
But they’re out there, and they mean business.
In fact there have always been ethical advisers – in spirit if not in name – and they could typically be found advising non-profits and religious charities.
As Mike Josephson, an adviser at Ethical Investment Services, says: “We’ve been working under this brand name for nearly 30 years. It’s not new ... but the elevated interest in the sector is certainly new. Beyond doubt, we as a group are getting a lift from what’s been coming out of the royal commission.”
Josephson is actually a former AMP adviser. He moved to the now beleaguered insurer by way of San Francisco. before settling in Melbourne and changing direction.
Likewise, Karen McLeod, Josephson’s colleague in Brisbane, initially worked at Godfrey Pembroke, an NAB financial planning subsidiary (which is now for sale following the royal commission) before she struck out for the sunnier pastures of ethical investing.
Will Hamilton, a regular contributor to The Australian and number 34 on the list this year, runs independent planner Hamilton Wealth Management. He does not brand himself an ethical adviser, but in common with many of his peers he certainly wants it to be clear he is ethical.
“Our industry is being put under a spotlight and that’s a positive development,” Hamilton says. “It throws up important issues and engenders debate about what the true objectives of the profession should be.”
So what then is an ethical adviser?
Needless to say, the vast majority of financial advisers would claim to be ethical and – in common with any other profession going through a scandalous period – it is clear most advisers have been left to work against the bad reputation that has been forged by a minority.
Within the profession there has also been a small group working on actively building an ethical framework. In fact they have their own representative body, the appropriately titled Ethical Advisers’ Co-operative.
The vast majority of financial advisers would claim to be ethical and most have been left to work against the bad reputation forged by a minority. However, the umbrella group for the entire sector is the Responsible Investing Association Australasia, which is the peak body for both Australia and New Zealand.
At the website responsibleinvestment.org, the association has built two very useful resources: a list of all the fund managers in the ethical sector, and a list of all financial advisers in Australia who have undertaken a course or receive specific accreditation from the RIAA. The second list has fewer than 100 advisers, a drop in
the ocean when you consider there are more than 20,000 across the local market.
Separately, the fund manager Australian Ethical Ltd keeps a list of advisers organised state by state. This list is similar but not identical to the RIAA.
Customers who actively seek out ethical advisers come from all walks of life, though McLeod readily volunteers that her company has a heavy representation among workers in non-profits such as charities and environmental protection groups. “We also get our fair share of academics,” she says.
More broadly, the customer base of many ethical planners is often not wide-eyed early-stage investors, but rather experienced ones who have come to the conclusion that mainstream planners are not representing their values. And those values can be complex – one investor might be pro-coal but anti-gambling; another may have no issue with gambling and be passionately anti-coal. The definition of ethical investing is thus variable, and there will always be grey areas.
For example, there is a perennial debate around nuclear power and uranium. Some environmentalists see nuclear power as the least worst alternative for industrial energy. At the other end of the spectrum there are those who will oppose electric cars, arguing that they still hook into industrial power and that those power plants will most likely still be sourcing from fossil fuels such as gas or even coal.
With such issues often bedevilling the wider area of responsible investing, a new movement has emerged among advisers and fund managers in recent years that seeks to go one step further than so called ESG (Environmental Social and Governance) investing. It’s called “impact investing”, and the idea is to focus on
taking action to achieve results rather than avoiding or screening out “bad” items such as tobacco and armaments – a traditional ESG approach.
Impact investing is in some ways a more aggressive ethical stance whereby the investor wants not just a result (in terms of ethics) but a return that derives from doing something rather than avoiding something. This form of investing involves financing a program or project. The benchmark example in Australia remains the rescue and takeover by Social Ventures Australia of 678 ABC childcare centres to create the Goodstart group in 2009.
More recently, impact investing has been heavily associated with social equity bonds, which can offer very handsome returns. Social housing activity such as the ambitious Nightingale projects, which are environmentally top grade and also cap investor returns, fit inside the impact investing area as well. However, it is clear many financial advisers are still getting to grips with the core proposals of ESG investing and even among ethical advisers there is reticence around impact investing.
For now the area is dominated by institutional investors such as big super funds or registered sophisticated investors (with assets of more than $2.5 million or incomes for more than two years consecutively of $250,000). Moreover, the pipeline of projects that fit both the social and economic criteria demanded by these investors has been slow to hit the market.
As one adviser explains: “We like the impact investing projects, and our customers are often very keen too – but there is a level of risk with impact investing we are often not comfortable with, especially if it is relatively inexperienced investors who don’t already have sufficient diversification ... It is an area where risk is difficult to
judge, so we find we often don’t respond to what are undeniably socially or environmentally attractive proposals.”
How to find an ethical adviser
Finding an ethical financial adviser might begin with a review of the advisers listed on the Responsible Investing Association Australasia (RIAA) website. The list is by no means exhaustive, but it is a useful starting point for anyone looking for advisers who have made ethical investing a specialisation by achieving the RIAA’s
Responsible Investment Certificate. If an adviser is at a loss to name ethical investing options you may have to widen your search. In the local market, the key issue is whether an adviser has ethical options on their approved products” list. Separately, there is nothing stopping the interested investor examining the market to
see what is on offer.
Among fund managers, some of the best-known ethical funds would include Perpetual Wholesale Ethical, Australian Ethical and BT Sustainable Balanced Fund. Specialist funds such as Generation Wholesale Global, Candriam Sustainable and Stewart Investors have also managed high returns in recent surveys.
There are also some new ETF (Exchange Traded Fund) products that invest in the sector through an index approach, such as the Betashares Global Sustainability Leaders ETF. This fund made the headlines recently when it refused to hold Facebook shares after the US tech giant hit a range of privacy and related ethical
Most clients will aim to anchor their portfolios with ethical products that provide the traditional balance.
“We find every customer takes a different approach,” says Mike Josephson at Ethical Investment Advisers. “They all have different values.” Josephson says most clients will eventually aim to anchor their portfolios with a suite of ethical products that provide much of the traditional balance an adviser would recommend on any conventional portfolio, but with a specialist focus on ethical issues.
For investors who want to go one step further into impact investing, adviser Karen McLeod tells The Deal: “Impact investing right now is more for a wholesale or sophisticated investor. Some of those projects include social benefit bonds, which have been rolled out by groups including the Queensland government. There are also funds and organisations such as the Impact Investment Group, which is looking at launching a solar infrastructure fund. “
Nonetheless, ethical advisers such as McLeod can point to a number of funds that are widely available to all investors, such as the BNP Paribas distributed impact environmental market fund, which is available in Australia. Similarly, the UK-based WHEB Sustainable Impact Fund is distributed by the fund manager Pengana.
Once you have found an ethical adviser, you’ll want to know whether their chosen investments perform. Most ethical advisers are able to point to product returns that beat a chosen index. Historically, the aversion to mining among ethical funds has meant they do better when resource shares are weak and not as well when resources – especially coal and oil – are on the rebound.
More interesting, perhaps, is a wider view taken by KPMG in a report released last month. It said that while there had been a perception “that responsible investing options underperform the wider market … the opposite appears more likely”.