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How to be good

YOU recycle, donate to charity and try to be an all-round good guy – and still, every month, your savings support the poisoning of African rivers and child labour.

The growing indignation of thousands of thinking investors has given rise to ethical investing over the past decades, with an estimated $1 out of every $10 invested in the US now going towards “responsible” investment.

Given that South Africa was one of the galvanizing factors in the development of ethical investments – investors in the West rebelled against having their money support the apartheid regime - it is ironic that there are so few options for local retail investors with a conscience.

Still, by doing a bit of homework you can avoid sustaining the dark side.

1. Prioritise

Capitalism is a dirty game and getting a squeaky clean investment option is difficult.

Looking through the investments options on the JSE, few shares will bring utter peace of mind. Many mining groups are blamed for pollution, construction groups stand accused of collusion, some food producers have already been fined for fixing prices, even cellphone companies may be indirectly supporting warring factions in the Democratic Republic of Congo, where materials are sourced for some of the world’s largest cellphone producers.

Savings accounts may not be entirely innocent either – do you know exactly what and who the bank is financing with your money?

All of this means you have to prioritise. You have to identify the issues you feel most strongly about – you won’t be able to save the whole world with your monthly debit order.

You have two options. You can decide where you don’t want your money to go – “negative” screening. This will mean that you avoid investments in certain activities, like gambling and weapon manufacturing.

For those with religious convictions, certain investments will cater for that. For Islamic investors, there are a number of local unit trusts that don’t invest in companies that produce alcohol, tobacco and in banks and insurers (Shariah law prohibits the payment of interest on loans).

Another option is “positive investing” – deciding who you want to reward with your money, and investing in the exemplary companies and  good causes.

2. Negative screening options

If you have identified companies and sectors you don’t want to support, it can be surprisingly difficult to avoid them. Unit trusts and pension funds move in and out of shares on a regular basis, so even if you do follow the underlying shares of your investments, it will be an expensive and tricky exercise to avoid putting your money in the baddies.

Unfortunately there are no local unit trusts on offer that promise to be "green" or "ethical”. (You can, however, use your foreign allowance to invest in some of the major global ethical funds.)

In South Africa, the focus is on sustainability. The JSE has developed a Socially Responsible Investment (SRI) Index, which excludes companies that do not adhere to good corporate governance  - as defined by the King report, which gives recommendations on things like transparency and shareholder protection. The SRI regularly investigates listed companies for their record on human rights, environmental practices and how they treat stakeholders.

About 74 companies are included in the index and while Netcare was recently booted off – no reason was given, but it was in the wake of the illegal transplant scandal – there remain concerns that the criteria are not strict enough.

A case in point is AngloGold Ashanti [JSE:ANG], accused of widespread pollution in Ghana and recently “crowned” as the world’s worst firm (even beating BP) in a poll organised by Greenpeace and other organisations. Local environmental groups also recently implored the JSE to take action against the inclusion of a number of other groups that stand accused of environmental abuse.

There are a couple of local funds that loosely track the SRI, but no fund actively does so.

One of the only unit trusts that focuses on “sustainable and responsible investing” is the Community Growth Equity Fund, a joint venture between Old Mutual and a group representing seven trade unions. The fund invests in JSE-listed companies that “have a clear commitment to job creation, skills development, affirmative action, sound environmental practices and effective corporate governance”. (The fund also holds shares in AngloGold Ashanti.)

Another benchmark for responsible investing is the United Nations Principles for Responsible Investment (UN PRI), which was launched in 2006. If your asset manager signed the UN PRI, it signifies a commitment to comply with environmental, social and corporate governance (ESG) issues in investment decisions.

Element Investment Managers, previously Frater Asset Management, was the first local asset management company to sign up to these principles. The group, which offers a number of unit trusts, has built up a reputation as a shareholder activist and is actively engaged with companies to improve their corporate governance policies.

Another signatory is the Public Investment Corporation, which manages government employees’ pension money.

3. Positive investment options

There are no local retail investment products that invest in “good” causes, like clean energy.

There are, however, a couple of funds that support the building of infrastructure and developing communities. These funds are mostly focused on pension funds and other institutional asset managers, and not open to the public.
 
Futuregrowth, for example, has a number of funds, including the Development Equity Fund and the Infrastructure and Development Bond Fund, with exposure to the financing of housing, agricultural projects and black economic empowerment.

If you really want to make a difference with your money in South Africa, where an estimated 51% of the population is living in poverty, consider social investment.

Civil society is facing the most serious and protracted funding crisis since the end of apartheid, says Sophie Hobbs, manager at GreaterGood SA, a public service organisation that connects givers with good causes.

GreaterGood has started the SA Social Investment Exchange (Sasix), which allows you to buy R50 “shares” in social development projects. Sasix organisations go through a rigorous evaluation process to make sure they have a “measurable impact”.

You won’t make any money from it, but you will know exactly where your money will be used and by whom.

For those who want their money to do good things but still need a return, “impact investing” is gaining big traction abroad.

Impact investment pools together investors’ money to provide financing for basic infrastructure projects like the provision of clean water, education, microlending and affordable housing, or for clean energy projects. You will earn interest on these types of investments. Some analysts reckon that the impact investment market can reach $1 trillion over the next decade.

GreaterCapital, as part of the GreaterGood group, is currently working with Cadiz Asset Management to start an impact investment vehicle for SA.

“When we started this joint venture with Cadiz, we faced resistance to the idea that impact investments could yield real returns for investors, as well as change lives on the ground in our country,” says GreaterGood group CEO Dean Hand.

“But the tide is turning as investors realise the enormous potential of socially responsible investing and the very real financial returns it can deliver.”

The joint venture is presently not offered as a retail product, and there is still resistance on the part of financial advisers to impact investing – many fear the financial returns are not so good.

“Our experience so far,” continues Hand, “has been that in times of economic instability, sustainable investments often perform better than traditional investments. The myth that impact investing offers sub-optimal returns is just that – a myth.”
 
Your pension money


While there isn’t any regulatory requirement that a specific percentage of pension funds has to allocated towards socially responsible investments, many funds are increasingly putting up to 5% in investments that have a “responsible” slant or support the community. Pension fund trustees can provide you with information about your own fund.

Investigate your investment manager. Before you entrust your money to an “ethical” asset manager, check their record.

Take the example of Oasis, which has made a name for itself as a Shariah investment manager. The asset manager was implicated in a scandal a couple of years ago after paying money to a high court judge under suspicious circumstances.

Do your homework about who will invest your money, and find out whether they subscribe to the UN PRI.

Don’t forget the basics

It is all very well to save the world and uplift the poor, but preferably you wouldn’t want to end up needing help yourself. Make sure you don’t make irresponsible investment decisions. Get a financial planner to advise you, and ensure that your savings are diversified and that you are not taking on unnecessary risk.

Be consistent

It makes no sense to have all your savings in “responsible” investments if you drive a massive fuel-guzzler, says Gregg Sneddon, an adviser of the financial planning firm the Financial Coach. He says investors who want to make the world a better place should first focus on their own behaviour, and then bring their investment strategies in line with their convictions.

- Fin24
 
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