Socially Responsible Investing
Socially Responsible Investing

The aim of this article is to provide an introduction to the strategy of socially responsible investing, to provide examples of the strategy in practice, and to highlight contemporary issues.

As the importance of sustainability in modern society rises, it has become an increasingly important aspect to consider for many investors when deciding where to direct their funds, giving rise to the implementation of socially responsible investing. There is a growing trend among investors to invest their capital into companies which they believe are ethical, sustainable and socially responsible.

There are a number of ways to evaluate whether or not a particular company fits this criteria, with much of it being up to the individual investor’s set of core values. There are however a few general factors which can be used to evaluate a company, these being the environmental, social and governance, or ESG factors. This may include a company’s carbon efficiency, investment in community programs, diversity of board structure, safety record and gender pay gap, among many others.

While the factors considered may vary between investors, there are two approaches which are used most commonly to evaluate a company’s ESG performance. These are:


Positive Screening

This involves investors actively seeking out companies which satisfy their ethical criteria. An investor more interested in the environmental component of ESG for example, may wish to invest in companies which are carbon efficient, or companies involved in the production of renewable energy. They will decide upon how they wish to evaluate a company’s environmental performance, and then seek out the companies that match this.


Negative Screening

This approach involves investors determining business practices which they find unacceptable, and then filtering out companies which engage in these practices. Common negative screens include companies which derive a large portion of their revenue from gambling, tobacco or the sale of armaments.

The key difference between the two approaches is that negative screening finds companies to be excluded from investment, whereas positive screening finds companies to invest in. It isn’t necessary however to use only one approach, and in practice most investors interested in socially responsible investing choose to use a combination of both positive and negative screens when constructing their ethical portfolio.

To demonstrate the use of positive and negative screens, we’ve looked at the ASX200 listed companies and evaluated their ESG performance on a range of factors. Whilst not being a definitive list, this gives us a better idea of which companies can be considered ‘ethical’, and which companies warrant exclusion from a responsibly invested portfolio.

Ethical ASX200 Companies

To begin with, we’ll start filtering out the ASX200 companies using negative screens, reducing our investment universe. We’ve filtered out companies heavily involved with gambling, tobacco, fossil fuels, and companies with poor gender diversity in the boardroom. This leaves us with 162 companies, from our original population of 200. From here we can rank the remaining companies on our ethical factors, to determine which companies are the most ethical, and therefore the most suitable to include in our ethical portfolio. It is important to remember that while we’ve applied the particular negative screens above, these may not be suitable for every investor. Individual investors should consider their own ethical values and beliefs, when determining the appropriate screens for their investments.

We’ve compared the remaining companies based on their environmental, social and governance performances. To simplify this process, we ranked the remaining companies on their corporate sustainability scores. This score, taken from CSRHub, aggregates data from a variety of news sources for Australian companies, and combines it into a single rating. This allows us to easily compare the ASX200 companies, and then evaluate their ESG performance relative to their peers. This score takes into account environmental, social and governance factors, providing a comprehensive rating of the company’s ESG performance. The top ASX200 companies in terms of ESG performance are as follows:

Investors wishing to invest their money ethically can be confident that the above companies are socially responsible.

It should also be noted that ANZ, Westpac and NAB appeared in the initial list, however due to the ongoing nature of the Royal Commission we have decided to exclude them. Some ethical investors exclude the banks straight off the bat as they engage in lending money to companies involved in the extraction of natural resources.

The list also includes three resource companies, Sandfire Resources NL, OZ Minerals Limited and Western Areas Limited. Some ethical investors exclude resource companies as they believe the extractive nature of their operations has detrimental effects on the environment. These three companies, however, all regularly publish sustainability information, and have shown a commitment to improving the sustainability of their operations. We believe this is enough to keep them in our list, however investors who feel strongly against resource companies may wish to exclude them from their individual portfolio.

ESG Disclosure

It is important for ASX listed companies to release information relevant to the ESG factors, to allow investors to make well-informed decisions when deciding to implement a sustainable investing strategy. Not every company listed on the ASX provides ESG information, and there is also a degree of inconsistency when it comes to reporting this information. To highlight the companies which release this information, we’ve ranked the ASX200 companies using Bloomberg’s ESG disclosure score. This score reflects the amount of ESG data reported by the individual company, ranging from 0.1, being the minimum amount of data reported, to 100, being the maximum amount of data reported. This score doesn’t evaluate a company’s performance, rather just the amount of relevant information they disclose. Disclosure scores can be valuable, because we believe reporting ESG information shows an increasingly greater commitment to sustainability, as it allows companies to be held accountable to their ESG performance. The top 20 ASX200 companies based off their ESG disclosure scores are as follows:

Source Bloomberg. As at 30 April 2018.

Interestingly, the list above shows that the companies disclosing the most, relevant ESG information tend to be companies with larger market caps. Of the companies with the 10 highest ESG disclosure scores, 5 of them are ranked in the top 10 for market capitalisation. This might be because smaller companies don’t have the time or resources to manage their ESG disclosure, whereas larger companies have the ability to more effectively gather and disclose this information. Over time as sustainable investing becomes a more wide-spread strategy, we believe the amount of relevant ESG information disclosed by ASX listed companies will tend to increase, not decrease, as investor demand for it grows.

Ethical Funds

If investors aren’t comfortable picking their own stocks, there are a range of ethically focused, exchange traded funds listed on the Australian stock market which aim to invest their funds in companies satisfying their specific ethical charter. These offer low cost, diverse solutions to investors who don’t wish to select their own stocks, but who want to ensure that their funds are invested ethically. Examples include:

Domestic Equities

BetaShares Australian Sustainability Leaders ETF – FAIR
This fund provides exposure to Australian companies engaged in sustainable business practices, filtering out companies involved in negative practices such as fossil fuels, gambling, alcohol and junk foods. It then ranks the remaining companies based on their sustainable business practices, such as energy and waste efficiency, giving preference to the sustainability leaders.

Russell Investments Australian Responsible ETF – RARI
This fund tracks the Russell Australia ESG High Dividend Index, holding only Australian equities, and being weighted towards companies which demonstrate positive ESG characteristics.

International Equities

VanEck Vectors MSCI International Sustainable Equity Fund – ESGI
This is an exchange traded fund which invests in global companies, excluding fossil fuels, high carbon emitters and companies with business activities which aren’t socially responsible. It tracks the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index.

BetaShares Global Sustainability Leaders ETF – ETHI
This fund also offered by BetaShares, provides exposure to 100 large global stocks, excluding Australian companies. Similarly, to the FAIR fund, this fund negatively screens out companies on a range of factors, such as tobacco, fossil fuels and armaments. It then ranks companies based on their climate performance, investing in companies they identify as climate leaders. It tracks the Nasdaq Future Global Sustainability Leaders Index.

As we can see, there are a number of options for investors to invest their funds ethically in both international and Australian shares using exchange traded funds.

Investors also have the option of investing their Superannuation responsibly as well; Australian Ethical Super is a super fund which excludes companies involved in coal, coal seam gas, oil, weapons, tobacco, logging and gambling, and is certified ethical by the Responsible Investment Association of Australasia (RIAA).

Does an ESG Strategy have to Sacrifice Return?

The goal of any investment is to earn a return on that investment, and so investors must consider their potential returns when investing their funds ethically, and whether this is in line with their financial goals. On the surface it may seem logical that ethical investing can compromise return, as it reduces the amount of companies available to invest in, lowering overall diversification and leading to investors missing out on returns generated by so called ‘sin companies’. If for example the resources sector experiences an upswing and starts generating large amounts of growth, many ethical investors will miss out on this return, as resource companies are commonly filtered out with negative screens. There is however a wide body of research suggesting that investing your funds in ethical companies doesn’t necessarily compromise return, and that many ethical indexes have outperformed the market.

The chart compares the performance of the underlying index which FAIR tracks, to the ASX200. As we can see, the ethical index has clearly outperformed the ASX200 over the 5 year period. The key takeaway here is that socially responsible investing and return aren’t mutually exclusive, investors shouldn’t shy away from responsible investment strategies simply because they are worried about sacrificing return.

The same can also be shown with global equities. To highlight this, we can compare an index comprising companies judged to be ethical to the MSCI world ex Australia index, as shown in the chart below.

The chart compares the performance of the underlying index tracked by ETHI being the Nasdaq Future Global Sustainability Leaders index, and the MSCI world ex Australia index. The chart clearly shows ETHI has outperformed the MSCI World ex Australia index over a 5-year period. This chart doesn’t take into account the fees incurred by investing in an exchange traded fund, it merely tracks the performances of the underlying index. It does however highlight that companies with strong records of performance in the ESG factors often exhibit high returns, as their focus on minimising ESG risk often leads to business practices which promote sustainable growth.


Source Bloomberg, Patersons Research


Source Bloomberg, Patersons Research

Socially Responsible Investing and Contemporary Issues

While we have looked at the theory and rationale behind the strategy of responsible investing, it is important to put these ideas into practice and see how they can be applied to real world investing. To highlight this, we’ve examined three topical issues, and evaluated how they would affect the decision making process in an ethical investing strategy.

Facebook Data Scandal

The recent data privacy scandal involving Facebook and political consulting firm Cambridge Analytica, has brought to light many issues with data privacy, and how readily accessible consumer data is to third parties. It has also generated a substantial amount of criticism for Facebook, and their policies surrounding consumer data and its protection. The scandal has led to severe backlash from the wider community, and raises the question, does Facebook warrant exclusion from an ethically invested portfolio based solely off the Cambridge Analytica scandal?

BetaShares’ Global Sustainability Leaders ETF, (ETHI) invests in global companies which the fund designates ‘climate change leaders’. Until recently this fund was invested in Facebook Inc. as it felt Facebook was a leader in reducing their carbon footprint. The data scandal however prompted BetaShares to remove Facebook from their portfolio. Even though Facebook remains a highly sustainable company when it comes to carbon emissions, their lack of control over the data of their users deems them worthy of exclusion from a socially responsible investment portfolio. There are two key considerations that can be taken away from this event:

That a company can be considered ethical under one set of criteria, and unethical under another. Facebook were, and remain a leader when it comes to carbon emissions, however their conduct regarding their protection of customer data (or lack thereof) doesn’t lend itself to that of an ethical company. This highlights the importance of an investor choosing their own ethical values to judge a company on, as it can affect the decision to include a particular company in an ethical portfolio

  • This also shows the importance of staying up to date when judging a company’s ESG performance, and re-evaluating this performance over time. Facebook were considered ethical at the start of the year, but due to recent events they arguably are no longer.

  • Over time as more information is released and new regulations are potentially introduced, Facebook may later warrant inclusion in an ethical portfolio. However, at this point in time it is hard to justify their inclusion.

Responsible Investing and Diversity

Gender diversity is an issue which can be considered both a social factor of a company’s ESG performance, and in the case of diversity on the board, a governance factor as well. There has been a growing initiative among ASX listed companies recently, aiming to promote increased gender diversity in the boardroom. The global diversity campaign, the 30% Club, recently launched in Australia with the aim of increasing gender diversity on the boards of ASX200 companies to at least 30%. We believe that gender diversity is an important issue in today’s society, and as a result when constructing a socially responsible portfolio it is an important metric to judge a company on. We’ve found that only 54 of the top 200 companies listed on the ASX currently meet this 30% benchmark, and 16 companies currently have no female board members. Diversity has been improving in more recent times however. The Australian Institute of Company Directors has found that the number of female directors appointed to ASX200 boards was greater than that of males during the first three months of the year, suggesting that companies listed on the ASX are trending in the right direction.

And while gender diversity is an important issue solely from a social point of view, there is a growing body of research showing that increased gender diversity in companies can also be correlated with increased returns. This isn’t limited to increased diversity in the boardroom, but also includes increased gender diversity in senior management as well. The below chart, taken from the Credit Suisse Gender 3000 report tracks the performance of companies with various levels of female diversity in senior management roles. It is important to consider gender diversity in senior management as well as in the boardroom, as it is senior management that is involved in the day-to-day decision making which affects the running of the company. This chart clearly shows that companies with higher numbers of women in senior management roles experienced higher returns over the time period. Further to this, a study published by HEC Montreal in 2006 found that companies with a high percentage of female officers generated excess returns of 6% over a three-year period.

While it is important to remember that correlation does not necessarily imply causation, investors should certainly take note of companies with strong gender diversity both in the boardroom and in senior management. The potential for higher returns will likely be reason enough, and as it is an important topical issue as well, we believe that companies working to address the gender imbalance in the workplace are definitely worthy of inclusion in a sustainably invested portfolio.

Share price performance for baskets with different tiers of female participation in senior management

Source: Credit Suisse “CS Gender 3000’

Royal Commission: Ethics of Financials

The big 4 banks have shown strong performances in recent years, and are commonly held in many portfolios, due to their often attractive yields, and perceived strength. They also comprise a large part of the ASX200 index, the big 4 banks alone represent 23% of the ASX200’s total market capitalisation, an astonishing amount given they represent only 2% of the number of companies.

The recent Royal Commission into misconduct in the banking and financial sector however, has brought to light many issues of unethical behaviour within the financial services industry. Ranging from continuing to charge clients for advice they don’t receive, to falsifying mortgage applications, it is clear that there are serious issues within the industry at present. As the focus of the commission has shifted to financial advice, it isn’t just the banks under the spotlight, AMP Capital have been a major source of scandal as well. These companies have all faced serious scrutiny, as such it begets the question: Should they be present in a responsibly invested portfolio? The key issues faced by AMP and the big 4 have been summarised below.

ANZ. Breaches of responsible lending requirements through their car finance business Esanda, unsuitable pre-approved overdraft offers, account admin errors, inappropriate financial advice, improper conduct by financial advisers.

Westpac. Irresponsible lending practices in car finance, unsuitable credit card limit increases, inappropriate financial advice.

NAB. Fraudulent loan applications, inappropriate financial advice.

CBA. Accreditation and arrangements with brokers, add-on insurance products, unsuitable overdraft facilities and automated system failures, fees for no service, investment platform fees.

AMP. Fees for no service, investment platform fees, inappropriate financial advice.

This is not a summation of the entire royal hearing, rather just a breakdown of the issues which the big 4 banks and AMP capital have faced. This pertains to the first 2 hearings only, there will be further hearings as the commission progresses. A quick glance at the information shows that Commonwealth Bank of Australia (CBA) have been among the worst offenders so far, AMP will also likely face severe penalties as not only did they provide inappropriate advice and charge fees without providing service, they also mislead the regulatory body ASIC, with AMP executive Anthony Regan ‘losing count’ of how many times this has occurred.

Should a responsibly invested portfolio include these companies then? Not every company in the financial sector has exhibited these problems, the regional banks and other financial companies have so far avoided scrutiny, as the commission progresses however this may change. Inappropriate financial advice has the ability to directly affect the everyday lives of investors. The provision of advice given to earn commissions and fees on products the banks themselves provide is highly unethical, as such, we would exclude the big 4 and AMP from any responsibly invested portfolio. The banks have shown a willingness to move out of wealth management and spin-off or sell their wealth management practices. In time this could prove a catalyst for them to lift their game and improve their standards, which could see them return to an ethical portfolio. At this point in time however, we believe that the issues uncovered by the Royal Commission are serious, and would therefore exclude these companies from an ethical portfolio.

Wesfarmers: A Company in the Spotlight

Wesfarmers have often been excluded from sustainably invested portfolios due to the underlying businesses they hold, such as their revenue from gambling on pokies in their Coles owned pubs and hotels, the sale of tobacco and alcohol through Coles, and their investments in coal assets. Recently however, management have announced significant changes to their holdings, such as their intention to demerge Coles, and the recent sale of their Curragh Coal mine to Coronado Coal Group. While they will still derive a portion of their revenue from gambling and the sale of alcohol, through their 20% holding in Coles via Liquorland, Vintage Cellars and 1st Choice, we feel this restructuring of the business removes the exclusionary screens previously placed on them. Wesfarmers will likely be the target of an increasing number of ethical funds in the future, reinforcing the idea that responsible investing isn’t a ‘set and forget’ strategy, it evolves over time as businesses do.


When considering investing their funds ethically, investors must ask themselves which values they hold most important, and how they can evaluate companies to ensure that they are investing in companies which match their ethical beliefs. Whether investing in individual companies, or exchange traded funds, there are a number of options available to investors who wish to invest ethically. While historical performance doesn’t guarantee future performance, ethical indexes have shown in the past that sustainability doesn’t necessarily compromise returns. As a result, socially responsible investing is a trend on the rise, and while it may not be suitable for every investor, it is a strategy worth considering.