New research paper shows the effects of socially responsible investing

A new research paper has been released by NAB, A Review of Socially Responsible Investing in Australia, exploring the ethical, social or environmental concerns that an investment platform may encounter. These socially responsible investments (SRI) include the capacity of a fund to earn both financial and ‘moral’ returns, and reflect a broader cultural shift in how we distribute our investment dollars.

The report was authored by Martin Foo as an independent paper for NAB by the Australian Centre for Financial Studies at Monash Business School. (Download PDF)

Globally, the European and American responsible investment industries are growing rapidly, with SRI fund managers contributing to strides in greenhouse gas reduction goals, sustainable forestry practices, and gender diversity on boards. 

Strategies for investment managers vary between:

  • negative screening - tobacco, gambling;

  • positive screening - sustainable energy, renewables;

  • norm-based screening - meeting minimum standard of business practice;

  • sustainability-themed investing – themes or assets specifically relating to sustainability;

  • impact investing – addressing environmental or social issues, while creating positive financial returns for investors; and

  • corporate advocacy and shareholder action – employment of shareholder power to influence corporate behaviour.

The number of SRI products being made available to investors is growing and the Australian responsible investment industry is maturing. The majority of Australian superannuation funds have made a form of public commitment to responsible investing, and several banks have arranged green bonds. The use of social impact bonds and impact investing are being explored by federal and state governments. The recent Adani mine rejection by banks on several fronts, including environmental, is a big sign to the industry that even traditionally bottom-line-focussed companies are participating in a real way. 

Scientific evidence has indicated that socially responsible investing will not be detrimental to financial returns and will often be beneficial to investors. The paper expands on the scientific evidence by conducting an historical equities analysis based on negative screening, specifically using the Australian Equities Database. This analysis is to show the minimal effects negative screening has on the returns of a portfolio from the top 20 companies between 1926 and 2015 (on average). This looks set to change and more is invested in positive industries, allowing for a shift. 

There would be no long-term detrimental effect on an index investor by filtering out companies involved in the explosives, tobacco, gaming, or alcohol industries, however screening out mining companies would have a larger effect on an Australian investor’s portfolio holdings, but for how long?