Ethical investment is often seen as a 'soft option' - but the environmental benefits of investing money ethically should not be underestimated. Initially slow to establish itself in Australia in comparison to overseas examples, this rapidly growing sector offers a wide range of options from investment in unit trusts to green superannuation. For long term environmental change to become a market reality, this form of activism is a must.

A New Forest Strategy:

Ethical Investment

James Thier
Australian Ethical Investment Ltd

Protecting the planet can take many forms; from activism involving protest marches and demonstrations, to publicly exposing inappropriate environmental behaviours, to campaigns which avoid or boycott particular products such as the current "Boycott Woodchipping Campaign". Still, many people shy away from the direct action inherent in these situations. Yet they are often no less passionate and no less committed about improving their environment and that of future generations.

Last year for example, while members of the Wilderness Society blockaded Boral's woodchipping operations, few probably thought they might, in any way, be inadvertently supporting the very company they actively opposed. Yet when we think about where such companies raise much of their capital, the probability becomes all too obvious. Most people may not immediately realise it, but it is through superannuation and conventional investments that these companies' activities are underwritten - from the investments of precisely those individuals who opposed the logging practices!

Some concerned individuals find direct action too confrontationalist - and hence seek more moderate alternatives. Nonetheless, whether those who participate actively also recognise the need to consider other aspects, a consideration of personal investment practices is highly advisable - otherwise many of their endeavours may be largely undone.

Ethical Investment - The Philosophy

The materialist 1980s saw environmentalism (re-)emerge as a serious contender for the public consciousness. Environmentally conscious individuals and consumers responded to these green issues in a variety of ways: from recycling as much of their rubbish as humanly possible, to excluding aerosol can purchases and even choosing brands according to their environmental record or that of the parent company. But many questioned the completeness of these expressions.Wasn't it equally relevant to know that monies invested weren't counteracting - even contradicting - one's acts or personal principles? Why buy unbleached toilet paper if your savings are being used to assist a company in making or selling chlorine bleach? Yet most people are unaware of the impact their investments actually have. What needed to be done was to integrate social matters with financial responsibility. Ethical Investment, unlike its conventional counterparts, grows from this dual regard for financial propriety and social conscience.

Investing ethically brings an acute awareness of environmental and social concerns to one's investment decisions. When investing your money, what it is actually being used for should rank equal in importance with getting a competitive return. Ethical investment integrates this social conscience with financial reward (by controlling what the money is actually used for).1 Thus, environmental initiatives are promoted and harmful activities shunned.

The two broad avenues by which ethical investment achieves its goal are: positive/directed means and negative/exclusionary means.

Positive courses of action actively seek out those endeavours that promote desirable outcomes, as established (hopefully) by reference to ethical criteria. On the other hand, negative 'screens' seek out and exclude or avoid situations likely to damage the environment. The majority of ethical funds essentially fall into this latter category.

Although ethical investment might sometimes be perceived as armchair activism, it can indeed be a potent force in changing the attitudes of companies that might otherwise have a negative impact on the environment. This has been more than clearly shown overseas where ethical investment is a multi-billion dollar industry. More importantly perhaps, the specific targeting of funds for smaller companies (not listed on the stock exchange) can literally make the difference between their survival or failure as viable business operations.

Ethical Investment - the Marketplace

Worldwide, ethical investments span the full gamut of investment options alongside their conventional (non-ethical) counterparts, including banks. Both Europe (particularly Germany and the UK) and North America have a strong and well established ethical investment product range giving investors a large selection to choose from. The size of the ethical investment funds management industry is difficult to quantify precisely - partly due to questions of definition. But in the United States for instance, some commentators have suggested ethically screened investments have accounted for over US 800 billion dollars, including 10% of mutual funds (the equivalent of unit trusts in Australia).

Historically, ethical investment had its contemporary beginnings in the anti-militarism and anti-racism Vietnam War protests and the Anti-Apartheid movement prominent in the United States during the 1960's. Growth since the 1970's has been profound, though the focus has progressively altered to encompass and emphasise an ethic of environmental responsibility. Importantly, financial performance has been admirable due to a capacity to foresee constraints which impair company performance. For example, refraining from investing in the nuclear power industry on environmental and pacifist grounds has kept funds clear of the disastrous investments offered in that industry over the last few decades. More recently the same holds true for the tobacco industry, and its declining fortunes.

The overseas experience contrasts markedly with that domestically. A few independent funds pioneered committed, genuine ethical investment in the mid-80's. Initial frameworks highlighted and focused upon environmental considerations. Corporate Australia did not begin in this field until the late 1980's when, in reaction to the corporate excesses of the period, some smaller and more innovative existing investment companies began offering 'ethical' alternatives within their otherwise unaltered investment product range. Many of these brought with them or adopted pre-existing structures which viewed ethical investment within broadly religious terms. Australia has only a small number of investment products available for the investing public (known as retail products) which are managed within an ethical framework. These range in size from $70,000 to over 10 million dollars. Excluding church-based funds (which are not available as investment options for the laity, let alone the ethical investing public), ethical investment in this country is a very small niche, representing less than 100 million dollars compared to a total managed retail funds industry of 86 billion dollars.

The complete domestic range available is contained in a recently compiled book - Ethical Investment in Australasia: A handbook for the Concerned Investor which is available from Wilderness Shops or by mail order from;

Ethinvest Pty Ltd,
15 Priory Close,
St Ives NSW 2075
for ($7.50 plus $2.50 postage and packing.)

Ethical Investment - In Practice

Much like their conventional counterparts, a variety of investment opportunities are open to the ethically attuned investor. Domestic opportunities publicly available generally fall into four categories: credit unions, unit trusts, shares and superannuation. Within each category, the ethically dominant options receive special attention. The ethical quality of the options varies, especially with regard to their attitude toward the importance of native forest protection, so not all of the "ethical" investment options can be recommended.

Credit Unions

These organisations (called credit co-operatives in Victoria) perform most of the same functions as banks except they operate on a democratic, not-for-profit basis. This means customers are all members - there is no segregation between customers/members and shareholders, with everyone entitled to one vote. Credit Union deposits do not have the backing of the Reserve Bank - making them potentially less secure than those in banks. The credit union movement does have its own contingency fund however, which acts in much the same way as the Reserve, ie. to protect member funds.

Due to their nature, credit unions are often seen as friendlier and more responsive to members. This is especially so for the smaller ones and those closer to their origins. Explicit socially and environmentally responsible investment policies are to be found in Maleny Community and District Credit Union (Qld), Macaulay Community Credit Co-Op (Vic) and Fitzroy and Carlton Community Credit Co-operative (Vic).

Unit Trusts

These pool investor savings, thus having the advantage of being able to invest more broadly than most individual investors, and so spread risks and opportunities. Fees are deducted from the trust's earnings. Their actual returns are not known in advance (unlike term deposits through banks or credit unions), and can occasionally be negative, but due to their fee structure they routinely provide higher returns than the term deposit option. The capital invested is not usually guaranteed. Unit trusts may be of a specialist nature, ranging from mortgage trusts which provide only income, to equities or property trusts which offer varying combinations of income and capital gain/growth with some tax advantages. Alternatively, investments may encompass several asset classes at once (a mixture of securities/loans, shares and property) via "managed" or "balanced" trusts.

Investments may only proceed through their prospectus (a prior disclosure document registered with the Australian Securities Commission) the major ethical options being: Australian Ethical Investment Trust, Australian Ethical Equities Trust and Tyndall Ethical Balanced Investment Trust.

There are several advantages to investing into trusts rather than attempting to pick individual shares (which might be assessed as conforming to certain ethical/environmental standards). The prime advantages of trust investments include:

Diversity - you are not limited to a single or small group of investments nor only one asset class (if wider spread is desired). This is important since it provides protection against losses should a single investment fail. Through such diversification any shocks in the financial markets are generally cushioned.

Research - ethical issues are not easily divined and considerable time and effort can be expended in effectively addressing the multiplicity of areas - not to mention the significant level of investigative and financial analysis skills required.

Administration - capital gains tax and other regulations can be complex and time-consuming matters in managing an investment portfolio. By investing through unit trusts such legislative requirements are automatically undertaken by those with a working knowledge of procedures and responsibility for trust management.

Shares

These generally offer the highest earnings potential over the long term, but are also among the highest risk relative to other types of traditional investment. Shares (sometimes called equities) also offer the advantage of directing much of their earnings into expansion and the capital growth of their share price rather than paying the money out as dividends where it would be taxable in the hands of the investor. For longer term investments this makes shares very attractive - provided people are willing and able to undertake the extensive research needed for success in direct investing.

Investing in shares is buying part-ownership of a company. The accessibility of companies for such investment falls into one of three tiers: publicly listed shares (those listed and traded on the stock exchange), unlisted public company shares (those not listed or traded on the stock exchange but which can be bought and sold through selected stockbrokers) and private company shares (which have a restriction on the number of shareholders to less than fifty but enjoy less stringent regulatory requirements).

Publicly listed shares
These offer investors the ability to select from the hundreds of companies on the stock exchange and thereby tailor investments to specific ethical preferences. The 'environment-friendly' listed stocks held by the Australian Ethical Trusts include Memtec, Transcom International, Environmental Recovery Services, Metalcorp, Mineral Control Instrumentation, Orbital Engine Company and Ribloc. The common thread running through these companies is that they are either preventing environmental degradation through technology or employing clever technology to solve or minimise the after-effects of pollution.

Private shares
These are not generally available to individual investors and it is also uncommon for them to be included within trusts. An exception is the Australian Ethical Trusts which recognise the opportunity for investors to participate in smaller, highly innovative businesses in their early growth phase (where profits are generally highest). They also recognise the benefits innovative and emerging business technologies can gain from assistance in this critical phase. Obviously, there are benefits here too in terms of "green, grass-roots" employment.

Unlisted shares
These will often have excellent ethical attractions and earnings potential. On the negative side they may be difficult to find and purchase, and it may not be easy to find a buyer when seeking to sell the shares. Profiles of two superior companies are:

Australian Ethical Investment Ltd
This is the only public company devoted to ethical investment in Australia. Its proactive ethical investment background is summarised in the motto: "for investors, society and the environment".

The company was established in 1986 and originally managed a private ethical trust, until 1989, when the August Investments Managed Trust (now called the Australian Ethical Investment Trust) was opened to the public. Since then the Australian Ethical Equities Trust was launched in November 1994. Owned by over seventy independent shareholders, the company anticipates a maiden dividend in 1997. Shares can be bought or sold through Austock Brokers Pty Ltd of Melbourne, a licensed member of the Australian Stock Exchange.

Earth Sanctuaries Limited
An award winning SA tourism and natural education facility operating in three locations. The stated aim is to ensure survival of remaining Australian native flora and fauna within a commercial environment. This is done by fencing to exclude vermin predators and then re-establishing native species.

The purpose of its ongoing capital raising is for further development of existing sanctuaries and for the purchase of appropriate land for more sanctuaries. Investors' principal aim should be the growth of this work, and as such investors should not expect income as the intention is to put most profits back into further development of sanctuaries.

Shares may be subscribed for through the prospectus or D&D Tolhurst, a Melbourne stockbroker.

Ethical Superannuation

With the introduction of compulsory superannuation a few years ago, such saving is set to become the dominant form on the investment scene. By the year 2000 some 600 billion dollars will be invested and its projected growth rate is 60 billion dollars a year.

Superannuation is special in that its earnings are concessionally taxed at the rate of 15% if accumulated until retirement age. Additionally, the self-employed can claim significant tax deductions for their contributions as can employers when they make contributions on behalf of their employees. Life offices, banks and union or industry funds are the big players but smaller innovative funds exist that offer an ethical option. Additionally, the so-called self-managed funds provide the investor with total control to select shares or an ethical unit trust for their accumulated benefits.

The Options
The goals of superannuation and ethical investment are both geared toward longer time horizons, potentially creating a positive force in environmental protection. It is not surprising then that superannuation funds represent over 3 million dollars in the 11 million dollars managed by the Australian Ethical Trusts and are a growing proportion of their funds under management.

Public Offer Master Trust
Master Trusts with Ethical Strategies in their regulated documents provide the simplest avenue to access the range of ethical investment outlined above. The main ones include Austrust Ltd, Lifetime Asset Management Programme (LAMP), Mercator Master Superannuation Plan and Freedom of Choice Master Fund.

This method is the most convenient and the least expensive for the smaller investor. Australian Ethical Investment Ltd, for example, has waived initial service charges for several master trusts which meet their criteria for "wholesale" investors.

The fees for such master trusts vary, but indicative values are an entry fee of 4% and annual fees of around 2-2.5%. The entry fees can usually be reduced by placing your investment through a financial planner or investment advisor.

Personal Self-Managed Trust
This method sets up a private fund with the individual or family members as the trustees who then establish and implement an investment strategy on their own behalf. Having less than five members, these funds are excluded from the detailed regulation applied by the Insurance and Superannuation Commission to the public offer funds - accordingly, they are sometimes referred to as "excluded funds". Indicative costs for this method are:

Initial Costs
(legal fees to establish the trust) -$500 - $600
(fees to invest in Australian Ethical) - nil

Ongoing Annual Costs
(accounting fees for basic compliance) - $400
for complete service - $1,400
independent advice on strategy -$400

Accordingly, the annual costs range from virtually nil for the confident do-it-yourselfer who selects one of the ethical unit trusts as their strategy, up to $1,800 for the fully advised and serviced client. Note also that extra legal fees will apply should legislative change require amendment of your trust deed in a subsequent year.

Generally, fund managers do not provide a service for implementing this method but financial planners, investment advisors and some solicitors do.

Employee Selection
Many employers adopt an ethical strategy for their staff superannuation and even those who are not so inclined will often accommodate an ethically-inclined employee by allowing them to nominate their own fund. Small employers are able to use the "excluded funds" route to provide ethical superannuation for their employees and this is a common practice in family businesses (although this is usually done for economy or to get control of investment strategy for other than ethical investment purposes). Larger employers often establish their own superannuation schemes whose trustees could readily adopt an ethical investment strategy if they chose - to date, none are known to have done so.

While it may be the employee's money being set aside for the employee's retirement, the selection of the investment strategy (and even the actual fund) technically rests with the employer under current legislation. In practice, however, many employers bow to union pressure and select an "industry fund" according to the occupation of the majority of their workers. The trustees of these funds have many union nominees on their boards which should augur for a democratically responsive investment strategy selection but, alas, no notice seems to be taken of the ethical preferences of the membership. (A few years ago there were media reports of unions teaming up with the Australian Conservation Foundation to provide "green super" as an adjunct to some industry schemes, but this proposal seems to have slid into oblivion.) The limitations of monolithic superannuation funds seem to have been noticed by the new Federal Government which has indicated it will require at least five choices for employees for their superannuation before the end of this century. It has also indicated that employees will get the right to remove their entitlement from employer-nominated funds at any time to invest them in the super fund of their choice. While the government's motivation seems to be to increase competition in the superannuation industry and to reduce the potential of "industry funds" to function as fundraising mechanisms for the sponsoring unions (which levy fees for their oversight through board membership), this injection of choice into the industry will provide the means for individuals to decide on investment style and ethics for their retirement savings. With rising environmental and social awareness, it seems inevitable that when the employees are given the five investment choices required by the government, at least one of them will be an ethical investment option. But it may take employee agitation to make the inevitable happen.

Tower Life Ethical Superannuation Bonds
Tower Life offers an "ethical" superannuation bond which could be used for self-employed superannuation or for roll-overs from the scheme of a previous employer but, as noted in Ethical Investment in Australasia... this fund includes a major investment in Amcor Ltd which while being "one of Australia's largest paper recyclers, it is also a major player in the felling of native forests for woodchips".

Australian Ethical Investment - a case study2
Australian Ethical is an independent funds manager dealing exclusively in ethical investment. As such, it is the only one of its kind. All others implement third party structures to give 'ethical' alternatives within an otherwise unaltered investment range. Widely acknowledged as the front runners in the field, the Australian Ethical Trusts have also grown to become the largest ethical investment grouping open to the public.

Investments in the Australian Ethical Trusts are selected in pursuit of a just and sustainable society, the protection of the natural environment and the provision of a competitive financial return to unitholders. These objectives are put into practice through the Australian Ethical Charter - the principles guiding the assembly and expansion of a premier portfolio of more than seventy broadly based environmental and socially responsible investments. This impressive outcome is despite the inherent rigour - most commentators consistently view Australian Ethical's Charter as both comprehensive and stringently applied.

The Australian Ethical Charter is of particular note, being unique in the Australian investment scene in several important ways. By combining twelve facets of corporate activity to be actively sought out and supported with investment, it provides a positive balance to the eleven facets which it lists as things to be avoided. Thus it accommodates the exclusionary and affirmative parameters, mentioned earlier. In addition, the Charter is applied in an integrated manner; not just as an "ethical screen" to vet and veto financially selected investment proposals.

As a consequence, both Trusts fulfil and go beyond some of the more common ethical investment practices of avoiding investment in repressive regimes, militarism, uranium mining, tobacco and alcohol production, gambling, rainforest/old growth logging, woodchipping or animal exploitation. Their strong, proactive principles as codified in the Australian Ethical Charter, complement the Charter's list of practices to be avoided and provide support to environmental and socially responsible activities. These include recycling, conservation, energy efficiency, preservation of endangered species, animal welfare, and a range of related issues.

The Australian Ethical Trusts are also unique in the ethical arena in their investment opportunities which are unavailable to the individual investors. This is because the Trusts target investments outside the listed companies of the stock exchange. The inclusion of loans and equity partnerships backing smaller business - a sector that has generally borne the brunt of institutional banking's withdrawal - directly assists in the development of worthwhile enterprises. Australian Ethical Trusts have no parallel in their locally based investment loans and equity partnerships that participate in the early phases of the innovation in the "green economy".

Some examples of these projects are:

• Advanced Energy Systems specialising in solar and wind powered technology for remote areas
• Quantum Technology making computer equipment and software for the blind
• Greg Jacobs and Partners redressing old used Australian hardwoods directly displacing the need for native forest logging.

Each fulfils a central role in advancing appropriate technology and resource usage. It would also be quite fair to say that many of the now flourishing small businesses in Australian Ethical's portfolio would not exist without such timely support, or at least would not be experiencing their current level of expansion and success.

How Do I Place an Ethical Investment?

The method of investment is generally the same for ethical investments as it is for their conventional counterparts, but they tend to have a lower marketing profile and are thus harder to find. The ethical credit unions are a good example of this as, once inside the door, dealing with them is just like any other credit union except that none of them has more than one branch. Most ethical investment organisations will have a prospectus or a customer information brochure that you can obtain through the mail by contacting them.

Alternatively, you may approach an ethical investment advisor to receive assistance to structure your ethical investments in a tax effective financial plan which can be implemented by the advisor in an integrated service. The advisor, in this case, will provide you with all the published data required to inform your investment decisions. Some investment advisors who specialise in ethical investment are listed below:

ACT
Trevor Lee
Ethinvest Pty Ltd
(06) 291 7313

NSW
Ross Knowles
Ethinvest Pty Ltd
(02) 440 8024

QLD
Terry Pinnell
Personal Investment Planners Pty Ltd
(07) 3278 2279

SA
Colleen Penny CFP SIA (Aff) BA BSoc Admin
Authorised Representative
Macquarie Equities Limited
Tel: 08 8203 0221
Fax: 08 8221 5212
E-mail: cpenny@macquarie.com.au

TAS
Bill Sharp
Financial Wisdom Ltd
(002) 34 3856

VIC
Janice Carpenter
Financial Wisdom Ltd
(03) 9853 0995

WA
Paul Meleng
Bowden Goldschmidt Pty Ltd
(09) 381 3395

For further information on ethical investment action, please read the section in this manual Getting Involved.

Conclusion

Increasingly, the public perceives ethical investment as the flip-side to recycling, conservation, preservation of endangered species, animal welfare, and a range of related issues. Now, with compulsory superannuation for all employees, most adults are investors of some kind whether that is their preference or not - but the choice to be an ethical investor still lies with them. The options are available with competitive fees and earnings track records and impressive records of growth in fund size such that ethical investment is now around 100 million dollars and still expanding strongly.

By participating in the targeted circulation of capital, genuine ethical investment can provide encouragement and support to many developing environmentally benign and even nurturing enterprises. It will hence make a real difference in creating the "green economy" that we all want.

Recommended Reading

"Aim High", the twice yearly newsletter for unitholders in either of the trusts managed by Australian Ethical Investment Ltd (available free to those interested in environmental and socially responsible investment upon request, 1800 021 227).

"Eco Invest", a bi-weekly global environmental stock market newsletter from Austria costing $US 400 per year ($US 200 for the German language version), Schweizertalstr. 8-10/5, A-1130 Vienna, Austria

"Ethical Investment in Australasia: A handbook for the Concerned Investor", Trevor Lee (editor), 1996.
Surveys the Australian and New Zealand scene listing 28 ethical investment organisations and setting out how to select and invest in them. A4 softcover, 36 pages, $7.50, available from the Native Forest Network or by mail order from Ethinvest Pty Ltd, 15 Priory Close, St Ives NSW 2075 for $7.50 plus $2.50 postage and packing.

"Global Agenda" by Keith Suter, Albatross Books, Sydney, 1993. The second book following "Global Change", detailing recommendations for global ethical monetary policies. Available from the Native Forest Network, $24.95 plus postage.

"Invested in the Common Good" by Susan Meeker-Lowry, New Society Publishers, Philadelphia, USA, 1995.
An excellent 260 page book of examples and philosophy of ethical investment in the American context. Available from Jura Books for $20.00 plus postage, phone: (02) 550 9931.

"The Ecology of Commerce" by Paul Hawken, Harper Collins (Phoenix, Orion Books), New York, USA, 1995,ISBN 1 85 7992164.
A well reasoned discussion of the power of commerce in our era, of how it is the only force powerful enough to repair the environmental damage now being sustained and of how to direct it globally toward that goal.

"The Ethical Investor" by Russell Sparkes, Harper Collins, London, 1995, $24.95, a B5 size paperback subtitled "How to make money work for society and the environment as well as for yourself", it surveys the UK scene in detail with some coverage of Europe and the USA but ignoring Australasia, 278 pages.

Footnotes

1. Traditionally, investments are made and judged by their risk and return. Generally speaking, the higher the risk, the higher the required return. (Predominant in Western cultures also, and a feature which simply accentuates the problem, is the demand for an immediate or short-term payback.) Ethical investment integrates another aspect, that of social conscience. In other words, what the money is actually being used for becomes an equally ranking consideration - it becomes part of the equation. If, on the other hand, the purpose to which the money is put totally outweighs any desire for return, then this extreme is conventionally regarded as a donation.
2. The Australian Ethical Trusts comprise two choices: an Investment Trust is conservatively designed and diversified across all asset classes. About half the asset allocation is in cash and securities (term deposits and small business loans), with some 10-15% in property and the remainder in equities (shares listed on the stock exchange and in unlisted companies). The majority of the return is in the form of income, rather than capital growth. The Equities Trust, launched in November 1994, focuses on the stockmarket and unlisted company shares. As a thoroughly researched product not previously available, the Australian Ethical Equities Trust is seen as an appropriate investment vehicle for higher income earners; those seeking the dual taxation benefits of dividend imputation tax credits and tax deferral through the accumulation of unrealised capital gains. The Trust is also suited to people for whom longer term returns are more important than immediate income, or where a specific, share oriented focus is advisable.