How to keep your investments ethical when markets fall

This article originally appeared in Stuff and was written by John Berry. 

John Berry is co-founder and chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management.

OPINION: When we feel like we have cash to spare, it seems easier to be generous. Conversely, if we’re tightening our belts, it can be that bit harder to think of others when we’re worried about our own.

For many, falling markets may pose a similar dilemma with investing responsibly.

If investing responsibly is just a “nice to have” to improve the world but not improve our individual wealth, can we afford to do it at a time when markets are going down?

Perhaps in falling markets even those caring about climate change, environmental degradation, human rights violations and animal exploitation need to focus on maximising returns and put ethics to one side.

The challenge with this kind of thinking is to accept that investing responsibly is a drag on returns. But investing ethically doesn’t automatically translate into losses in falling markets.

You’ve likely seen the value of your KiwiSaver balance fall this year in response to lower share and bond prices.

The US stock market is down around 22.1% this year, with technology shares having been particularly hard hit. Closer to home the New Zealand market is down 18.9% so far this year and Australia is down 12.5%.

The question around ethical investing becomes increasingly relevant not only because markets have fallen from their peaks, but also because more and more KiwiSaver investors want their fund manager to take environmental and social factors into account.

Research this year from MindfulMoney shows 73% of Kiwis expect their investments to be ethical or responsible. In fact, over half (56%) would consider moving their money if their fund manager was invested in companies engaging in activities that weren’t consistent with their values.

So these Kiwis, three out of four people, want to invest ethically, but they also want reassurance that their values aren’t costing them good returns.

They hope to achieve a balance between wealth and well-being from KiwiSaver funds that have a strong ethical focus. Let’s look at the balanced fund category, and the performance of funds that identify (through their name or marketing) as having a strong ethical or responsible focus.

On average these funds actually outperformed the wider balanced fund return for the year to the end of May. The ethical or responsible balanced fund was down by less than the average balanced KiwiSaver fund.

This is also true over the prior two years, which were rising markets. Returns from the ethical or responsible funds have on average been higher over the last three years than the average balanced KiwiSaver.

This is consistent with Responsible Investment Association of Australasia numbers to the end of last year for Australian and New Zealand responsible investment funds. On average these funds outperformed over three, five and ten years.

It’s important to think about whether this good performance is by design or by luck. I argue that using environmental, social and governance metrics to find ‘better’ or ‘good’ companies is also a filter for finding higher quality or more innovative companies. Higher quality companies should be lower investment risk over the long term, which intuitively means a stronger brand, greater customer loyalty and higher profits.

Investing ethically is not just to feel good at rising markets and to be shunned in falling markets. Fund manager returns seem to be telling us that regardless of what markets are doing, you can invest ethically or responsibly without any cost to your returns.

This commentary is general information only – it’s always a good idea to seek professional financial advice for your personal circumstances.