Aussie's love for ethical investments is blossoming with the amount of capital pouring into funds that espouse such principled values has surged nearly five-fold over the last six years to $1 trillion.
This means ethical investments make up nearly half of the $2.24 trillion managed by professional managers in this country, according to data from Responsible Investment Association Australasia (RIAA) and reported in the Australian Financial Review.
The flow to capital into fund managers deemed to be "responsible" was a mere $178 billion in 2013, or just 17% of the total.
Ethical means better returns
I like to think that Australian investors are motivated by their conscience although there's a financial argument to this trend. Ethical funds are outperforming with average annual returns of 6.43% over five years and 12.39% over the last decade.
In contrast, RIAA said that the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index generated annual returns of 5.6% and 8.91% over the two periods, respectively.
The findings are consistent with other reports that I've read which showed that environmental, social and governance (ESG) focused funds tend to do better over the longer-term than those who only screen stocks based on financial criteria.
As you can probably tell, ethical investments cover a pretty broad church and it does make sense that using some type of ESG filter on stock picks will yield better results – particularly on the "G" component.
Why it makes dollars and sense to focus on ethics
I tend to avoid companies with poor governance practices as I've lost money on stocks that appeared to have blue-sky potential but with questionable moral values. Governance is often linked to the quality of management and experience has shown me that shareholder value creation is driven more by this factor than any other.
Don't confuse governance with industry though. There can be a great management culture in an organisation that operates in sectors that true blue ethical investors would avoid – such as gaming, alcohol and defence.
Applying a very strict rule to what you consider ethical can hinder your returns and even most of the funds that RIAA classify as "ethical" are so-called "ESG integration funds", which are allowed to invest in controversial sectors such as fossil fuels, narcotics and pornography (I'd like to know which ASX-listed company is in this last sector!).
RIAA also surveyed retail investors on their key concerns when it comes to where they invest and climate change comes out on top. Human rights, controversial weapons and tobacco are right behind the climate, in that order.
