‘Just better investing’: How top ethical fund picks its winners
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The head of Australia’s biggest pure-play ethical fund, John McMurdo, warns that corporate greenwashing is deterring sceptical investors and consumers otherwise keen to do the right thing.
“A trust deficit is starting to emerge, which doesn’t surprise me in the slightest,” says McMurdo, chief executive of the listed Australian Ethical Investment which has $8.5 billion under management.
Australian Ethical chief executive John McMurdo. Credit: James Alcock
“There is a lot of fake news and a lot of greenwashing, so it’s hard for investors to know what to believe. This has become a cancer where bad cells in the ecosystem run the risk of eroding the benefit of the good cells.”
Cognisant of the emerging dangers, the Australian Securities and Investments Commission (ASIC) recently warned of the spreading practice of misrepresenting the extent to which a financial investment or product is “environmentally friendly, sustainable or ethical”.
ASIC has followed up with its first greenwashing legal action, against retail superannuation provider Mercer. The regulator alleges Mercer purported not to invest in fossil fuel, alcohol and gambling companies, but in fact, did so.
McMurdo says much of the problem lies with the lack of black-and-white definitions as to what constitutes an ethical investment.
He says the oft-used term ESG (environment, social and governance) is a form of greenwashing itself, as it denotes a financial valuation tool rather than a means to prevent evils such as pollution or labour exploitation.
“ESG is simply about understanding the risks to a particular sector or business and then driving a financial valuation to take account of the risk,” he says. “It sort of stops there.”
McMurdo says many retail investors would be “horrified” about what assets are included in ethical funds.
While the so-called negative screens are straightforward, such as excluding companies involved in tobacco, gambling or armaments, the selection process becomes muddied from there.
Often banks are forbidden because of their questionable lending practices and customer mistreatment, as highlighted by the banking royal commission.
McMurdo says while there are no-go areas such as lending to coal miner Adani, the banks also play a “significant role for good” in funding low-carbon investments.
“If we are to get anywhere near the Paris Agreement [emission reductions] targets we need swathes of capital to get there,” he says.
“We need a strong banking sector supporting good companies and technologies and our job is to assess which ones are genuinely doing that.”
Australian Ethical avoids greenwashing and financially unsound proposals with a two-stage process by which potential investments are scrutinised by an ethics team and then a finance committee.
Any proposal has to be approved by both parties, which often appraise an investment through a very different lens.
“Not every green company meets our investment thresholds,” McMurdo says. “It’s a very deep process where in effect we choose the best-of-the-best in terms of ethics and investment alignment.”
Some acceptable investments later have been excluded because circumstances have changed.
For instance, the fund ejected Marsh & McLennan, which provides insurance services to Adani and its high-volume, low-quality Queensland mine.
Banks that lend to coal miners are often excluded from ethical investing portfolios.Credit: AP
While building material providers James Hardie Industries, Wagners and Brickworks are excluded for insufficient carbon abatement strategies, CSR gets the tick for producing insulation and adopting “meaningful emissions reduction targets”.
Australian Ethical invested in Lendlease, given the need to build housing for future generations.
But it has also long campaigned against the company’s Mt Gilead development in southwestern Sydney that threatens koala habitat. In March the fund decided the bad outweighed the good and dumped Lendlease from its portfolio, citing inadequate measures to protect the arboreal marsupials.
Given Australian Ethical has billions of investor dollars to place, it can’t invest only in ‘impact’ enterprises that unambiguously do good things.
But McMurdo says there’s no shortage of companies with great ideas to invest in, across sectors such as tech, biotech, healthcare and even habitat preservation.
“With the existential threat the world faces, there needs to be hundreds and millions of dollars directed to positive solutions and we are seeing that all the time,” he says.
Australian Ethical was founded in 1986 – an outlier in an era of greed when ‘doing the right thing’ meant getting away with insider trading or tax evasion.
Since beginning in 1994, the company’s flagship Australian shares fund has delivered 12.5 per cent compound return, against 9.8 per cent for the ASX 300 accumulation index.
“It’s always been for a commercial outcome,” McMurdo says. “This is not philanthropy; we just think of it as better investing.”
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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