Emily Hollingum’s 5 tips to get your organisation started on mission investing.
The trend towards responsible investing is growing – in 2017 the amount of funds invested responsibly increased 188% and they now account for 12% of total assets under management in Australia. One of the groups leading this trend are not-for-profits and foundations undertaking mission investing.
Mission investing involves aligning your investments with the goals of your organisation. For example, if your foundation supports women and girls then it makes sense to invest in companies that support gender equality. Or if your foundation supports those living below-the-poverty line, then why not invest in companies that pay a living-wage and avoid companies involved in destructive practices like gambling and pay-day-lending.
With more responsible investment options available than ever, it’s easy to align your investments with your mission. Here are some tips to get you started:
1. Define your investment mission
Your organisation will have a clearly defined mission, the next step is to translate that mission into an investment philosophy. It’s worth considering this from both a positive and a negative perspective to identify companies you do want to invest in, and those you don’t.
You’ll also need to place some thresholds on the level of involvement. For example, Woolworths is the largest pokie operator in Australia, but it is predominantly known for its grocery stores. Will it be excluded in your gambling ban, or will you just exclude Crown and Tabcorp?
Here’s a copy of our exclusionary criteria as an example.
2. Search for investments
There are a number of ways in which you can start investing:
- Use a professional advisor. An experienced advisor can help you align your investments with your mission. The Ethical Advisors Co-op has a list of advisors that specialise in ethical investments, it’s worth seeing a specialist as they are more likely to be up to speed with the latest products on the market. They can also construct a direct share portfolio for you to ensure that the investment exactly matches your mission.
- Invest yourself. If you decide to invest yourself you could invest using:
- Exchange-Traded Funds (ETFs): Investing via ETFs can be a great low-cost way to create a well-diversified portfolio. If you’re interested in investing via ETFs, Balance Impact provides a guide of global ethical ETFs, updated annually.
- Actively-Managed Funds: There are a number of actively managed funds available that have responsible investment screens. The Responsible Investment Association of Australasia (RIAA) has a tool that allows you to search for funds that match your ethical goals.
- High Impact, unlisted investments: The Impact Investing Hub contains a list of current impact investing funds and direct investments available in Australia. Most of these are low-liquidity, long-term investments. We would recommend investing only a small portion of your portfolio (5%-10%) in these investments
3. Read the small print
In the ethical investing world there are no standardised definitions. Even if a fund excludes an industry from its portfolio, this does not mean that the exposure within your portfolio will be zero. Most funds will use a revenue threshold, eg a company is excluded if it generates more than 5% revenue from a particular industry.
It’s important to consider whether you are comfortable with exclusions on the basis of revenue, or if you would like an industry to be excluded completely. Let’s consider Woolworths again, the revenue that they generate from poker machines is less than 5% of their total revenue, but it is still over $1.5 billion. It comes down to how strongly you feel about the industry.
If wading through the small print of offer documents is not your thing, the quickest way to check if a fund is true-to-label is to download a list of current holdings. If you’re trying to exclude fossil fuels, but the fund contains Woodside, Caltex and Santos then no need to read the small print, you can move on to the next fund.
4. Consider fees and financial performance
Investing responsibly shouldn’t cost more than mainstream investing. There are some well-priced responsible investment funds on offer. These include responsible exchange-traded funds, and Listed Investment Companies (LICs). ETFs and LICs are available for purchase on the Australian Stock Exchange.
Whether you have decided to invest in a low-cost ETF, or a higher cost actively managed fund, check to see that any higher fees are justified by higher performance. When considering performance, it is better to focus on longer-term performance (5+ years) than short-term performance, as it is more likely to show a trend rather than a one-off.
The RIAA produce a report each year comparing the performance of mainstream investments to responsible investments. The good news is that over the last 3, 5 and 10-year periods Australian responsible investment funds have outperformed mainstream investment funds. This illustrates that you don’t need to sacrifice returns to align your investments with your mission.
5. Measure your social impact
Try to define at least five key factors that you’ll use to measure how successfully your investments are achieving your mission. For example, if you’re investing to support gender equality then perhaps you’d consider:
- The gender diversity of staff at different levels of the company.
- The gender wage gap.
- Female friendly leave policies on parental leave, domestic violence leave, carers leave.
- Safety at work – including how a company deals with bullying and sexual harassment.
- The number of female customers of the company.
The metrics you use will depend very much on what your goal is. The Global Impact Reporting Network (GIIN) provides a comprehensive set of metrics to help in impact reporting.
Responsible investing has come a long way over the past few years. There are now a wide range of products available at competitive price points to suit any investment mission, and useful tools to help with your impact reporting.
Emily Hollingum is Founder and CEO Balance Impact has over 15 years experience in financial markets. Specialising in responsible investing, Hollingum has worked in New York, London and Sydney for Merrill Lynch, The Royal Bank of Scotland and Westpac Bank.
Balance Impact is Australia’s first 100% online ethical investment advisor, Balance Impact constructs socially responsible investment portfolios. Using a sophisticated online platform, Balance Impact fixed fee model offers investors, high value, low cost responsible investment service. Already outperforming the market, Balance Impact delivers smarter diversification with access to global ethical investment opportunities.
Catering for a range of risk profiles, Balance Impact is ideal for SMSF Trustees, not-for-profit organisations, and investors looking to increase their diversification across a range of ethical, future focused industries.
Setting it apart from other ethical advisors is a strict screening criteria and transparency so investors understand how their money is doing good in the world. Ideal for not-for-profit organisations looking to maximise fund reserves, while meeting rigorous reporting requirements. With a user friendly interface, Balance Impact investors gain full visibility of financial and social impact returns across their investment portfolios.