SRI is not a charity donation
There is a sentiment among retail investors that socially responsible investing (SRI) is rather like a charity—you don’t get the same returns as a “normal” investment. Performance figures, however, prove that you can have a conscience and make money.
Funds like Old Mutual’s Community Growth Equity Fund, which focuses on companies that are environmentally and socially aware, and Futuregrowth’s Albaraka Equity Fund, which focuses on Shariah-compliant investments, have both outperformed the JSE All-Share Index over a five-year period.
The latest Alexander Forbes bond survey shows Futuregrowth’s Infrastructure Bond Fund as the top-performing bond fund over the past year, and over five years it has returned 12,61% to investors compared to the All Bond Index return of 11,88%.
According to Andrew Canter of Futuregrowth, when it comes to savings and pension funds, people are simply not prepared to give away returns, so to try and sell a product that does not give a competitive return would be a waste of time. Yet it is possible to do more with your money and to express a social view in much the same way you may buy free-range chicken or recycle plastic.
According to Community Growth portfolio manager Douglas Davids, the starting point for any SRI fund is basic fundamental analysis. The company has to be able to deliver superior performance before it gets on to the watchlist. It is only then that there is an overview in terms of social and environmental criteria and good corporate governance.
The logic is that a company that follows practices that ensure long-term sustainability, like caring about its people and the environment, will prosper over the long term.
Davids says his fund will meet with unions to ensure that management practises what it preaches. This is a powerful tool and Davids says there have been incidences where companies have fallen short on their employee relationships and are taken off the investment list, although the fund manager will continue to engage with them to see if there are improvements. Some of the companies that make it into Davids’s fund include several banks, Imperial, Anglo American, City Lodge and MTN. Old Mutual also undertakes negative screening, which eliminates certain companies due to the products they sell or manufacture, such as tobacco companies. “This can be a challenge when a company like Richemont performs well as it makes up a large percentage of the index. But we have still managed to outperform the index with good stock selection.”
So far, however, SRI funds only really attract inflows from institutional clients, especially large pension funds that are managed on behalf of the unions. “There is still a misconception by the retail client that SRI funds are some sort of charity donation,” says Davids.
Bond funds and property funds are able to actually use the money they raise to invest in infrastructure in South Africa’s underdeveloped areas. For example, Futuregrowth’s property fund invests in retail centres in underdeveloped areas and its bond fund has recently provided finance to support minibus-taxi owners.
The key to SRI is that money talks. If companies know money will flow when they behave responsibly, they will be encouraged to change their ways. The biggest example of this is the re-insurance industry, which commands literally hundreds of billions of dollars globally. Because the biggest threat to their industry is global warming, resulting in increased claims from victims of floods and storms, they only invest in companies that follow environmentally sound practices.