Strong returns from ethical investing

Strong returns from ethical investing

Uniting Financial Services (UFS) invests according to the ethical investment principles that Synod believes capture the values of the Uniting Church as a whole. Does this mean that we’re sacrificing stronger financial outcomes as a compromise with getting positive ‘emotional’ or ‘spiritual’ returns?

The question of how ethical investments perform, relative to other investment approaches, is usually answered with data on returns (over the medium to long term) from an ethical portfolio, compared against returns from an unconstrained portfolio.

The evidence is that ethical approaches provide at least similar returns to unconstrained portfolios.

This shouldn’t surprise us. People who scoff at ethical approaches presume that unethical activities are more profitable over time than everything else, so leaving them out of a portfolio must mean missing out on that excess performance. However, to borrow from George Gershwin, it ain’t necessarily so.

It’s undeniable that some of the activities we exclude under the Church’s investment policy can deliver strong investment performance. Companies involved in gambling, for instance, can be very well managed, target their markets cleverly, control expenses and grow their earnings. They may deliver stronger returns than the rest of the market, at least for a time, and an ethical investment fund misses out on this. The Bible refers to this possibility in passages such as Psalm 73, which begins by wondering why the unscrupulous seem to be so successful.

However, for every company engaged in unacceptable activities that might generate a little bit better return than the market, there are also those whose unethical behaviour produces significant losses. Recently, there was a high profile example of this on our front pages.

I’m sure most of you know the story about Volkswagen cheating on the emissions testing of diesel engines. When it became public, the impact on VW’s share price was swift and severe, falling by about 40 per cent in a week. The yield on its corporate bonds escalated, resulting in at least short-term capital losses for bond holders. (UFS had no exposure to VW, in shares or bonds, by the way.)

All of that was because of unethical behaviour, resulting in a significant financial loss for investors.

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It’s worth noting that even before this scandal broke, VW had poor ratings from research companies that focus on things such as Governance standards. Both for Corporate Governance and Accounting standards, VW was ranked in the bottom 30 per cent of companies. This wasn’t a prediction that something as bad as the emissions scandal was imminent, but it was a warning signal for ethically minded investors.

From despairing that the wicked seem to prosper, Psalm 73 goes on to reflect on how God has ‘set them in slippery places’ from which they will ‘fall to ruin’. It says this not to enable pride among God’s people, but self-reflection and repentance. There, but for the grace of God, we may also go.

Similarly, ethical investors should not gloat about VW’s predicament, even though it supports our approach. Humility, not hubris, is called for.

However, the sad story of VW is a salient reminder that unethical behaviour can be destructive for commercial sustainability. Ethical investors may miss out on some strong returning investments, but they also stand a good chance of avoiding some bad situations as well. They can expect investment returns no worse than anyone else, provided their funds are managed properly in other ways.

How we invest our money matters. My prayer is that all of us, at UFS and the whole of the Uniting Church, will draw near to God and always seek to invest in companies that behave with integrity and sound ethics.

Warren Bird

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