SMSF’s are one of the fastest growing assets classes within the Australian financial landscape and for good reason. SMSF’s offer attractive tax incentives, greater opportunity to diversify assets and can be more cost effective than traditional retail or industry super funds.
When it comes to diversification with an SMSF, a trustee(s) is not limited by choice. Asset classes, such as shares, property, cash and fixed interest are readily available and easily accessible. However, in an age of social responsibility, does an SMSF trustee have the opportunity to realise investment returns while not compromising their values?
Firstly, what is a socially responsible investment? There is no set definition for such a term; historically one invested for the sole purpose of maximising returns. Socially responsible investing is a strategy that seeks that outcome but also adds the parameter of seeking social good. In recent times, the term, environmental, social and corporate governance (ESG )has been the term used to define that social good.
In summary, the aim of socially responsible investment is to generate financial returns while not compromising on the environmental, social and corporate governance impact associated with the investment.
So how does an SMSF trustee make the decision on whether an investment is socially responsible or meets the environmental, social and corporate governance standards that he or she wish to meet?
Traditionally there has been a two-pronged approach to SRI investment, which can also be applied within an SMSF.
- Negative screening: When looking at SRI, negative screening is the simplest method of applying a basic approach to this form of investing. Such an approach can also be applicable within a Self Managed Superfund. It is simply avoiding investments in sectors that have a negative impact on the environment or society. This negative screening will differ according to the individual or investment committee making the investment decision. Common examples of negative screening are not investing in assets which have ties to
- Weapons and ammunition manufacturing
- Gambling
- Tobacco
Negative screening is not limited to the above examples. Take the Australian investment landscape, and you will see a rising tide of investors negative screening coal-related investments. This means excluding any companies who have an interest in coal exploration, mining or transportation. Negative screening can be a simple yet effective way for Self Manages Super Fund (SMSF’s) to align their investments with the ESG methodology.
2. Positive Screening: Positive screening is a more active approach to socially responsible investing. This approach is rising amongst self-managed super fund trustees, and involves, not only negative screening but then actively seeking investments or firms who are setting positive examples of environmentally friendly products or production and practices which facilitate and encourage responsible initiatives. Examples of a positive screen may include investing in a financial institution with a strong drive and plan to reduce carbon emissions: or a food producer who sources its products from developing countries but has strict policies and criteria in place meaning it doesn’t underpay or mistreat workers from this developing country.
Do I compromise on the return when applying SRI in my SMSF?
This is a common question for SMSF trustees, and the answer is simple, NO. SRI doesn’t require one to compromise on returns. In fact, there are numerous studies and reports suggesting that SRI has outperformed active managers consistently in the last decade. That’s a debate for another article.
The key for any SMSF trustee or investor is to ensure that a socially responsible investment is not made purely on the companies ESG score or rating. Let’s take the stock market for example. Socially responsible investing doesn’t disregard fundamental analysis, factors such debt to equity, management outlook, macroeconomic factors, and product risk should be analysed hand in hand with ESG factors.
Further to this, the golden rule of diversification remains ever constant. An SMSF SRI portfolio doesn’t mean it is comprised solely of renewable energy firms, quite the contrary. An effective SMSF SRI portfolio has investments in the financial sector, commodities, industrials, and consumer discretionary. There are even fixed interest products that have a focus on SRI and provide good returns.
Regardless of your investment mandate, the sheer quantity of funds being moved to this approach on a global scale means SRI methodology can not be ignored by SMSF trustees and investors.
Disclaimer:
This Communication has been prepared by Vertical Capital Markets Pty Ltd (ABN 11 147 186 114 AFS Licence No. 418418) trading as VFS Group (VFS Group).
This Communication is for general information purposes only. It does not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of the information contained in this report, you should consider whether the information is appropriate in light of your particular investment objectives, financial situation or particular needs. You may wish to consult an appropriately qualified professional to advise you. Derivatives can be highly leveraged, carry a high level of risk and are not suitable for all investors. Investors should only invest in such products if they have experience in derivatives and understand the associated risks.
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