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Bloomsbury blog A responsible approach to Socially Responsible Investing (SRI)

Bloomsbury newsletter, 30 September 2015

We work with a diverse group of clients, each with different interests and priorities, so it is no surprise that we occasionally get asked about Socially Responsible Investing (SRI).

SRI combines investors' financial objectives with their concerns about environmental and social issues. For example, an investor may not want to own shares in businesses that produce tobacco, make firearms or produce fossil fuels.

This idea is so attractive that one publication estimated SRI increased in the United States from $641 billion in 2012, to almost $2 trillion by 2014.1 There are over 450 SRI funds in the United States alone.

While attractive in theory, there are potential issues with SRI.

Everyone has a different definition of what's socially responsible

What exactly is a socially responsible business? Many SRI funds were established at the behest of the Catholic Church, which has very specific views on a wide range of issues. For example, it is inconceivable that a Catholic SRI fund would ever invest in manufacturers of artificial contraception! Whilst that is entirely consistent with the Catholic Church's views, their values may not always align with those of other socially responsible investors.

Unfortunately, the deeper you look, the more you realise that accurately classifying responsible businesses is challenging. Is McDonald's socially responsible? A number of SRI funds say yes, but McDonald's has a reputation for paying low wages and contributing to obesity. What about PepsiCo, a global giant in the soft drink and energy drink market? A recent study from Tufts University in Boston found that sugary drinks may contribute to the deaths of over 150,000 adults each year.2 And what about Bank of America, which had to pay record fines for its role in the Global Financial Crisis?

Vanguard, the second largest asset manager in the world, includes each of these companies in its Social Index Fund.3 However, even though Vanguard may classify these businesses as socially responsible, individual investors may decide they do not meet their own socially responsible investment criteria. This challenge is summarised by the Forum for Sustainable and Responsible Investment, which states there is "no single approach and no single term" to determine what counts as socially responsible investing.

If you scrutinise any business carefully enough, you will probably uncover something about it you don't agree with. Trying to match your own values with those of a business is a challenging, if not impossible task.

The high cost of social responsibility

In terms of ethical investment options, there are very few that are available as managed funds in New Zealand.

AMP Capital have five SRI (PIE) funds that they offer.4 As at 30 June 2015, the largest of these, the AMP Capital Responsible Investment Global Shares Fund:

  • Had approximately $49.1 million invested in it
  • Was benchmarked against the MSCI All Country World Index with net dividends reinvested (50% hedged to the NZD on a net after tax basis)
  • Had entry and exit fees of 0.25% each
  • Had an annual management fee of 1.35%

Compared with our core recommended international equity fund, this AMP fund is about four times more expensive to manage (1.35% compared to 0.34%) and 1.6 times more expensive to trade (0.25% compared to 0.15%).

AMP is not alone in offering expensive SRI funds. Hunter Hall is probably the best known Australasian fund manager offering a range of Australian dollar SRIs, via Australian unit trusts.

Their flagship fund is the Value Growth Trust, which has a long track record and is globally diversified. However, it is an expensive fund, with a 1.64% management fee and a performance fee. In the year to June 2015 its total management expense ratio was 1.78%, excluding the performance fee. The Hunter Hall fund is about 5.2 times more expensive than our core recommendation. The Value Growth Trust utilises "negative" screens to remove, in Hunter Hall's opinion, companies that are harmful to people, destructive to the environment or cruel to animals. Of course, this filtering reduces diversification.

Outside of AMP and Hunter Hall (and a few others), it is also possible to participate in SRI via exchange traded funds and UK listed trusts. These options are often more concentrated, and no less expensive.

What does this extra expense and reduced diversification mean to investors? The extra expense alone means you should expect to earn at least 1.00% less return in your portfolio each year if you want to use these SRI funds.

What does this extra expense and reduced diversification mean to investors?

If that doesn't sound like a big sacrifice, it should. If we look at returns after fees, taxes and inflation, we get the real story.

Let's say a portfolio earns 7.5%. After advice and platform fees, let's say this reduces to 6.0%. Taxes take away approximately 1.4%, and average inflation, another 2%. You are left with 2.6% real return above inflation. In this day and age that's a reasonable deal, and much better than term deposits after tax and inflation. However, if you invest in expensive SRI funds you are probably paying at least an additional 1.0% per year in fees. That drops your after fee, after inflation and after tax return from 2.6% to 1.6%.

That's a 38% drop. By any measure that's a huge sacrifice to make, all in the difficult to define name of socially responsible investing.

To put that number in context, an investor with $500,000, who wanted their money to last until age 90, could spend approximately $26,500 (inflation adjusted) per year out of their portfolio. However, with 1% per annum lower returns they would find that they ran out of money four years too soon.

What about the impact of reduced diversification? Lower diversification means the investment outcomes from SRI funds are likely to be less reliable, and deviate from your expectations more often.

Is there an answer?

In time we believe that markets will provide investors with better socially responsible investment options. A fund currently not available in New Zealand is the Vanguard FTSE Social Index Fund, which costs 0.27%. We expect, over time, that such options will be open to New Zealand investors.

However, this doesn't address whether a firm like Vanguard has the same definition of social responsibility as you have.

We believe that the best approach, at least currently, is to invest via the low cost and highly diversified approach we've traditionally adopted. The investor then takes the money they save using this approach and uses it to support the social interest or environmental group that best fits with their specific values.

Following this approach, the investor:

  1. Maintains a low cost and highly diversified approach to their portfolio that maximises the probability they will achieve their personal financial goals and objectives
  2. Supports the organisations they believe in, not the ones chosen by another entity
  3. Elects in any year whether or not they can afford their contribution rather than being locked in via higher cost funds
  4. Can change the organisations they support easily

If the support is given to registered charities, the investor will also qualify for a tax refund for their support. This tax benefit can help reduce the taxes payable on their portfolio.

While SRI is an incredibly appealing idea to many, the implementation of an investment strategy to suit each individual is very challenging. We think it is likely that SRI fund offerings will continue to slowly evolve and we hope that ultimately brings greater efficiency and clarity about how SRI funds can meet the specific demands of each investor. In the meantime we hope this summary has at least given you plenty of food for thought on this topical subject.


  1. The Forum for Sustainable and Responsible Investment - SRI Basics
  2. Daily Mail - Fizzy drinks lethal toll: Scientists warn they kill 184,000 a year through diabetes, heart disease and cancer
  3. Vanguard FTSE Social Index Fund Investor Shares
  4. AMP Capital Responsible Investment Leaders Global Shares Fund