Ethical or ‘responsible’ investing has been slow to take off among Australian investors, but that could change in the wake of findings from the financial services royal commission.
According to analyst James Tayler of Morphic Asset Management, ethical investing will surge next year, even as global markets are predicted to face further turmoil.
Tayler told Trading Day that younger generations particularly are driving change, while the royal commission has brought home the prevalence of unethical business practices.
“The royal commission has put a huge spotlight on the broad financial services industry in this country, through looking at the banks and through looking at businesses like AMP,” he said.
Responsible investing has been slowly gaining in popularity among companies in recent years as environmental and business practices become a bigger focus of the public.
Last year, AMP Capital divested itself of all investment in tobacco-related investments from its portfolios as part of a move to follow a “new ethical framework.”
But a report by Morphic has found Australia is well behind the United States, even as studies prove investing in ethical funds can deliver high returns.
Just around six per cent of global and Australian equity funds sold in Australia meet sustainable and responsible investing requirements, according to the report, compared to around 21 per cent in the United States.
Tayler said part of that is to do with the misconception here that investing responsibly will hurt returns.
“It’s often bandied around that there’s a cost to being an ethical investor, that’s thoroughly discredited. There’s plenty of academic evidence now that this is not the case,” he said.
“This is a snowball that is about a quarter of the way down the hill…. and it’s only going to get bigger and bigger.”
While the term differs between experts, ethical investing essentially means to choose companies that avoid certain ‘unethical practices’ based on a person’s beliefs.
That could be the production of environmentally or socially harmful products such as weapons and tobacco or more cultural factors such as company support for workplace diversity and inclusion measures, customer service and respect of customer privacy.
Watch the video above for more on ethical investing.