An Appraisal of Socially Responsible Investments and Implications for Trustees and Other Investment Fiduciaries

Abstract

SRI investments in Australia now exceed AUD1.9 billion. A number of high profile superannuation funds have recently embraced SRI strategies, and strong growth is forecast. This momentum, however, has not been matched with a robust legal framework for appraising SRI strategies.

The Report addresses the central proposition of SRI - whether it is possible to "invest for good" without any financial sacrifice. Using a unique methodology, the Report tests the effect of removing shares in companies that operate in the so-called "sinful industries" from the market portfolio - these are principally companies in the alcohol, armaments, gaming, pornography or tobacco sectors. Over a seven year period, the analysis concludes that, in the Australian context, investors avoiding shares in the "sinful industries" sacrificed returns of approximately 0.70% per annum.

This Report reveals significant differences between the approaches used by different Australian fund managers to construct SRI portfolios. For example, some Australian funds do not exclude undesirable companies; instead, they downweight the shares of those companies relative to the company's market capitalisation. Thus, notwithstanding a fund's "environmentally-aware" or ethical labelling, that fund's investment portfolio may, in fact, include "polluters" and "shooters" (that is, chemical, mining and petroleum companies, and armaments manufacturers).

Keywords: Ethical Investment, Socially Responsible Investment, Mutual Funds, Prudent Investor Rule

JEL Classification: G11, G23, K22