Ethical Investment Adviser, Hope Evans, featured in a recent XY Adviser Podcast:
As ethical investing becomes truly mainstream, investors are faced with the challenging task of telling the green from the green-washed.
Chair of the Ethical Advisers Co-op (EAC) Terry Pinnell speaks to the Financial Standard, “As advisers, we are constantly being bombarded by companies that say they are ethically minded and environmentally friendly, but when we look at what their investments are it’s a completely different story.”
Read the full article and find out how EACs rating system works at:
In order to provide more information about investing ethically and sustainably, the Ethical Advisers’ Co-op has put together some key sources of information and resources we believe you will find helpful.
Chris Lang, senior adviser at Ethical Investment Advisers, recently appeared in an article “Positive Thinking” in Money Magazine.
A private ancillary fund, often referred to as a PAF, is a philanthropic trust structure that helps you take a more planned approach to your giving. A PAF gives you more control over your giving strategy. It also enables you to continue your giving over time rather than making a large one-off payment. When you establish a PAF, your donation is invested and the earnings from those investments are distributed to charities of your choice in perpetuity.
A private ancillary fund is a type of charitable trust, your own foundation that you control with the purpose of providing funding to charities. Put simply, when you establish a PAF, you donate capital into it (usually an initial donation of $500,000-$1 million) and receive an immediate tax deduction for the donation. Alternatively, the tax deduction can be spread over up to five years. The capital is then invested long term, and a minimum of 5% of the value of the PAF assets must be distributed as grants to charities each year.
A private ancillary fund also gives you total control over how your capital is invested, and the amount you give each year to support your favourite causes. Giving is planned and effective. Giving through a private ancillary fund inspires future generations, and provides families with unexpected and welcome rewards, as you share your philanthropic values.
The money you donate into your private ancillary fund (both now and into the future) is tax exempt, and franking credits are refunded, so your philanthropic dollar goes much further.
Establishing and managing your own PAF is the most flexible and hands-on approach to giving and will require financial resources to engage an independent trustee, hold formal meetings, prepare and lodge annual tax returns, as well as manage the capital in the PAF from which minimum distributions of 5% of the capital are made to your preferred DGR charities. We can assist in sourcing reputable providers of these services upon request.
What is a sub-fund in a public ancillary fund?
A public ancillary fund (PuAF) has the same tax advantages as a PAF but is a communal structure. Unlike a PAF, there is no requirement to establish a new trust or trustee company, so a sub-fund can be established immediately, and there’s minimal set-up cost to do this. Amounts donated are usually smaller with a minimum of $50,000, and the contribution is tax deductable. The tax deduction can be claimed in full immediately or spread over the next five years.
A minimum of 4% of the sub-fund’s balance must be distributed to charities each year, allowing you to achieve a regular ongoing flow of distributions to your preferred charities as opposed to making larger one-off lump sum direct donations. You can also nominate successors to advise the Trustee, ensuring your giving legacy continues beyond your lifetime.
In a Public Ancillary Fund, you may have less control over how your funds are invested (although there are ethically screened options available). You still have a say over where the donations are made, however the trustee has the ultimate power to direct donations. To join a Private Ancillary Fund, there are low set up costs, however there is likely to be an ongoing administration fee.
Sub-funds in public ancillary funds are one of the fastest growing charitable structures in Australia. They give a tax deduction immediately with the flexibility to determine the charitable recipients later, can be established immediately (which is especially helpful in the final days of June), and cost nothing to set up.
You then advise the Trustee of the public ancillary fund which charities are to receive a distribution from your sub-fund and the quantum of the distribution. To be eligible, a charity must have Deductible Gift Recipient Item 1 status, and there are over 25,000 charities to choose from.
Whilst you take the time to do your due diligence in deciding which charities you want to support from your sub-fund, the balance is invested. Investment returns are tax-free and franking credits are refunded so there is real potential to grow the amount that you give to charity over time.
After you have built up the balance through donations and investment returns, should you decide that you want to take full control of investment and administrative responsibilities, you can choose to establish your own private ancillary fund. This makes sense for balances over $1,000,000 and you are usually able to transfer your sub-fund to a new private ancillary fund (some providers have restrictions on this, so it is best to check before establishing the sub-fund).
Why set up a philanthropic structure?
Tax deductions are a great incentive to set up a philanthropic structure of your own, but that’s by no means the full story. People choose to establish a foundation for a range of reasons, including a wish to involve the family in giving, concerns around succession planning, and a desire to be actively involved in the charities they support over the long-term.
Family is perhaps one of the most powerful incentives as giving through a PAF is a good way to engage other family members. It can increase children’s social awareness and help to inspire future generations.
Clients who receive a taxable gain (such as a business/ equity sale or large redundancy payout) often want to share their good fortune with others, but do not want to make a quick decision and donate the entire amount in one go. A PAF or PuAF allows an immediate tax deduction while the choice of charity can be made at a later stage when there’s more time for research.
Philanthropy isn’t just for the super wealthy
There is a perception that philanthropy is only for the super-wealthy. Certainly, you do need a reasonable level of wealth to set up your own structure, but it is by no means the realm of high profile business people and the ultra-rich alone. A sub-fund can be established with a donation of $50,000, and the funds can be invested according to your ethical criteria.
When people first start and are still growing the assets of their foundation, the grants being distributed are likely to be relatively modest in size. This does not mean that they are ineffective. Part of the beauty of having your own structure is that you are not bound by the bureaucracy of some of the larger, more established foundations. Donors can be nimble and responsive, using their intuition and stepping in quickly where other funders may not be able to respond promptly.
Small grants given in a considered way can be very impactful. Many people like to fund those areas that are overlooked by government, or to support slightly riskier, pilot projects that seek to find new ways to respond to some of society’s most entrenched and difficult issues. Many people will also make a contribution that is much more powerful than dollars alone, using their expertise, skills and networks to support the charities in which they are involved.
Getting started
Setting up a PAF is straightforward but, as a new entity has to be established, you’ll need to allow a reasonable amount of time to get something up and running before 30 June. A sub-fund, on the other hand, can be established right up until the end of the financial year, creating an immediate tax deduction for the entire amount, while leaving the decisions on which charities to support spread out over time.
PAF’s: A Summary
How often do I have to contribute to my fund? As often or as infrequently as you like.
Can I get a tax deduction? Yes – can be spread over 5 years.
Can the general public contribute to my fund? No.
Who is the trustee? You must use a special purpose company, for whom you nominate directors, to act as trustee.
Who are the directors of the trustee? You can choose. Directors will generally be family members and/or business associates and one independent person (the ‘Responsible Person’).
Can I have a say in grantmaking decisions? Yes. The directors of the trustee company have the final say.
Who can receive grants? Charities with Deductible Gift Recipient (DGR) Item 1 status.
Who manages the investments? We can manage the investments for you on your behalf.
Are there establishment and ongoing costs? Yes, contact us for details.
Can I make withdrawals from the PAF? No, once you have made a contribution, the funds must stay invested in the PAF.
Recent polling by the Responsible Investment Association of Australasia revealed that 9 in 10 (92%) Australians expect their super funds and other investments to be invested responsibly and ethically. These and other findings from the study, which will be covered in more detail throughout, suggest that the expectations of investors are changing quickly. On the horizon is a wave of investors who are savvy, principled and more willing than ever to make financial decisions based on values.
Funds and managers must be ready to evolve with these trends and deliver the service that their clients demand. Being ready for the future will depend on understanding what’s driving these changes, how investing may be affected, and how to more effectively accommodate ethically-driven investors.
The demand for responsible investment seems to be following a greater sense of urgency about social, environmental and governmental issues. This urgency is reflected in the fact that 4 in 5 Australians claim that they would consider switching their super or other investments to another provider if they felt their values were violated.
‘Which values?’ is a question that seems to have many answers. Issues of all types are defining the investing behavior of Australians. 82% of Australians report that they always consider social issues before investing. That group further identified their top issues as renewable energy (48%), healthcare/medical products (45%), and sustainable practices (44%).
Shockingly, respondents also reported that responsibility was an even bigger priority for them than profitability. 7 in 10 (69%) claimed that they would rather invest in a responsible super fund, that considers ESG and maximizes financial returns, rather than a super fund that exclusively considers maximizing financial returns (31%).
Though certain portfolios were identified as more attractive, Australians also felt strongly about behavior they would not tolerate from their funds. 69% of respondents claimed to be uninterested in funds involved with animal cruelty. 62% felt the same about human rights violations. More than half of respondents avoided funds that involved pornography.
These changes may be partly driven by the moods of millennials. Millennials were identified as the most likely to change super providers over activity that violated their values, with 88% saying they would switch. However, Generation X and the Boomers were not much less committed to ethical behaviour, with 77%, and 68% reporting they would switch, respectively.
These trends suggest that all investing professionals should be making changes to better account for the responsibility of standard investments and super funds. The demands for responsibility extend to professionals and services at all levels of investing, including financial advisors. Financial advisors are considered particularly accountable. 63% of Australians already expect their advisers to incorporate their values, though the tools to easily find and show the impact of ethical investments are not currently well developed.
Poor reporting requirements and limited available data make it difficult for advisors to certify that funds don’t include any questionable investments. That may be why Australians are showing a strong preference for certification. 86% of Australians agree that they would be more likely to invest in an opportunity if it had been certified by an independent third party that emphasised responsibility.
Millennials felt most strongly about the need for independent certification. 93% of them claimed it would make them more likely to invest, and certification was also a priority for 85% of Gen Xers and 83% of Baby Boomers.
The facts suggest that managers and advisors need to further develop their tools and relationships in order to meet the demands of their investors. Investors will increasingly demand more responsible practices, and they prefer certification from a source they can trust.
Managers will need to make hard decisions about any participation in industries that are considered socially or environmentally harmful. However, that shouldn’t mean making less profitable choices. The preference that investors show for emerging industries and socially-responsible investments may point the way to the most successful super funds of the future. Managers can take advantage of this if they’re willing to lay the groundwork by researching and curating ethical investments for clients.
The now nearly-universal demands for responsible investing came on quite quickly, but that doesn’t mean it’s a fad that will fade away. The vanishing of national treasures like The Great Barrier Reef is a constant reminder that responsible and sustainable industry has wide-ranging consequences for everyone.
Change the world and live a happier, less stressful life.
What if our actions to save the planet required no sacrifices, made financial sense, and, even better, contributed to us leading brilliant, happy lives?
This would change the world.
The purpose of this book is to make you rich, with enough money to finance the best life you can imagine; rich in time, quality, dreams and meaning; rich in making a difference to the problems facing the world. Together we will examine five topics that will assist in financing your brilliant life, helping to change the world:
With action in these five areas customised to your dreams, passions and ambitions, you and your family can be a shining example of success for others to envy and emulate. Positive outcomes for you, your family and the planet. No sacrifices required. Get started and make it happen!
Order the book or find out more at richgreenie.com
‘Ethics pay’ for astute investors
SID MAHER THE AUSTRALIAN 12:00AM June 14, 2018
Karen McLeod didn’t need a royal commission to show her that when it comes to
financial advice, ethics does pay.
Ms McLeod, who runs Ethical Investment Advisers at Bulimba in Brisbane’s inner eastern suburbs, said investors did not have to sacrifice returns to back businesses that made the planet sustainable.
The Deal magazine published in The Australian tomorrow finds that ethical investment businesses are finding increased interest from potential customers as the misdeeds of financial advisers working for some of the nation’s biggest financial services companies have been exposed at the royal commission.
“Culture is important,’’ Ms McLeod said.
While time will tell whether the royal commission will ultimately push more people toward ethical investment advisers, Ms McLeod said she believed nine out of 10 people wanted to see their money invested responsibly.
Yet when it comes to ethical investing there is a fair bit of nuance to what people are looking for, and it depends of their background. Geologists, for example, might be looking to focus on lithium or nickel but pretty much everyone looking at the ethical investment space wants to avoid backing alcohol or tobacco or gambling.
Ms McLeod said there were good opportunities in the ethical investment space such as backing recycling technologies or health technologies or the environment … “things making life cleaner’’.
She said many of her customers were looking towards the future and backing “the planet they would like to live on in the next 20 years’’.
Any suggestion that it was necessary to sacrifice performance for ethics was a “myth’’.
A benchmarking report by the Responsible Investment Association of Australasia, the peak industry body representing the ethical investment sector, shows its funds
https://www.theaustralian.com.au/business/financial-services/ethics-pay-for-astute-investors/news-story/b54eac6a97e6ecf83e79d2d3bc1c70b1?csp=81ee82bcd4… 1/5
6/18/2018 ‘Ethics pay’ for astute investors
have outperformed average largecap Australian share funds over three, five and 10 year time horizons.
The average return of responsible investment funds was 7 per cent over one and three years, 13 per cent over five years and 6.3 per cent over 10 years.
Largecap Australian share funds returned 8.8 per cent over one year, 5.4 per cent per cent over three years, 10.8 per cent over five years and 3.8 per cent over 10 years.
The S&P/ASX 300 accumulation index returned 11.8 per cent over one year, 6.6 per cent over three years, 11.6 per cent over five years and 4.4 per cent over 10 years.
Australians investors are not finding it as simple as they’d like to locate information about the stocks involved in their super funds. Investors and shareholders don’t have a convenient way to gather information from a single source, and that’s becoming more of a problem as investors become increasingly engaged.
Investors care deeply about the social and environmental impacts of their investments, as research by the RIAA recently revealed. An overwhelming majority (86%) of Australians believe it is important for a super fund to invest money responsibly. They expect managers to investing in companies that build clean energy infrastructure or avoid investments that can harm communities such as weapons manufacturing. This preference has already increased from 69% in 2013.
Despite massive and growing interest, serious problems with available information remain.
Engaged investors need information to act on their values. Understanding the impact of a super fund in Australia requires gathering information from infrequent and exhausting sources. Some investors are getting the only information they can by engaging with company boards during Annual General Meetings (AGMs). Of course, these meetings happen only once a year, and there is only limited time for questions.
Others have tried writing or calling fund managers directly to discuss stock investment or divestment, but super funds can involve hundreds or thousands of stocks to talk over.
Clearly, a more accessible solution is needed for investors. As more of them choose to engage, they’ll start expecting better access. That access is most likely to come from either a legislative solution or from funds and advisors manoeuvring to better serve their clients.
Many countries already have Portfolio Holding Disclosure laws on the books that require companies to collect and provide information about each fund to investors. In fact, Australia is now the only market in a recent study by Morningstar that didn’t have any form of legislation requiring disclosure in place. That study rated Australia’s transparency at a D+, compared to other nations.
It’s not that a legislative solution to disclose holding lists hasn’t been considered. In fact, the draft of that legislation has been moving through parliament for years. Just recently, it was pushed back for the fourth time, and won’t be considered again until 1 July, 2019. It seems for the time being, Australians may be stuck with incomplete disclosures and limited access to information from executives.
Without hope for a legislative solution for at least another year, the question of how engaged investors can be better served falls to the private market.
There is much that super funds and their managers can do to better serve engaged investors, and plenty of reasons to get started as soon as possible. If funds cannot build trust with investors, they may find
themselves reliant on independent organisations for credibility. At this point, more than half of all Australians (56%) believe there is not enough independent information available about switching to a responsible ethical super fund, or such an option within a fund.
One possible path could be to step in front of future legislation by ensuring that reporting requirements are already met before the law goes into effect. In addition to providing information that engaged investors are hungry for, this path has the added benefit of future proofing the fund’s practices so that eventual changes in the law are easier to weather.
Ultimately, a relationship with an independent certification organisation may also be necessary. 86% of Australians agree that they would be more likely to invest in an organisation, fund or product if it had been certified by an independent third party. If a certification organisation already has more trust among investors, it’s practical to take advantage of that by beginning a relationship, and meeting the standards for certification.
Now that investors are starting to care deeply about the impact of their stocks, they aren’t likely to stop. The demands for more information and more accurate reporting will likely be a major feature of stockholder meetings and AGMs, at least until Australia mandates more comprehensive reporting through legislation.
Until then, fund managers and investment advisors must develop their own means of meeting their client’s demands. Creating strong reporting standards and forging relationships with independent certification organisations can help bridge the gap between what investors want, and the reporting that’s available for engaged investors right now.
Picture: Richard Whitfield
The Australian
May 26, 2018
Reporter
Melbourne
@RichAFerguson
The banking sector needs to figure out how they align their values and understand what their customers actually want. The Responsible Investment Association has surveyed consumers and they expect super and other investments to be invested responsibly. They don’t want their CEO to be unfairly renumerated or doing things that are illegal. When banks and other financial institutions align their values with their customers, people may start trusting them again.
Some ethical ETFs have already dropped bank stocks. Is there is a case for taking banks and insurers off ethical investment lists?
We always look to write either a letter to the board, or a resolution at an AGM. And if nothing comes of that, divesting that stock. We’re about supporting or rewarding companies that do the right thing. We’re looking at how banks are responding to the commission, who is doing the right thing, and why are they doing it.
The returns have been quite strong and been outperforming the average mainstream counterparts year on year. In 2017, the benchmark report showed that these funds had been outperforming competitors over three, five, and 10-year horizons. Responsible investment is not something that’s new. It’s something that’s been consistently setting ethical funds apart.
The reason for that is we know the companies we’re investing in so much better. We’re not just looking at a set of numbers. We’re looking at how they’re viewed by the community, how other stakeholders view them, how they treat their customers and what the diversity is like on their boards. And how they respond to questions — that speaks volumes about a company.
We’ve run a mid-cap model portfolio for roughly four years which is fossil free, and we deliberately have a positive screen on that fund. We’re looking at companies that do good in the world as well as excluding all the obvious things. And it’s done 8.29 per cent since inception, as about July 30. For the past 12 months, it’s done 5.94 per cent. And for three years, it’s done 6.96 per cent. If there’s anything there that clients don’t like, we can exclude them from it. It’s only happened once or twice, but we want customers to know they have that freedom. Listening to clients is something the financial sector clearly needs to do more of.
The majority is in renewables: companies like Meridian Energy are doing very well. There are stocks that are not necessarily aligned to an environmental output. Hub 24 (an investment platform) is a stock we own — it’s a financial tech company that helps ethical investors to invest in stocks that have just come to the country. Separately, we like stocks such as blood products group CSL, Freedom Foods and Select Harvest.
Coal is going for another run on the stock market. When will it no longer be an investment option?
It’s estimated there won’t be any coal-fired power in the electricity market by 2030. That’s quite soon really if you’re an investor. I can’t say when a coal stock will be suitable to sell, but I would be a bit concerned.
My clients and I don’t support these stocks. There simply hasn’t been a decent response to how we deal with the waste. It’s not something that’s of interest to us when we have free sun and wind to back power (laughs).
It seems like ethical investing is becoming more built into the broader financial market now … would you agree?
One-hundred per cent. I don’t even mention it most of the time; it’s just part of what we do. We care about corporate governance and we do look at diversity on the boards. Not just gender diversity but diversity of expertise. You don’t want a board that agrees on everything, that would be boring, and gender and ethnicity are a part of that.
I was working at a large financial institution that helped wealthy individuals invest their money and I became dismayed at the lack of understanding in issues beyond finance. Investing my clients’ money in Coca Cola and tobacco seemed to me against the things I wanted to support. I couldn’t see why I wanted to invest in a company that hurts people’s health. The light bulb moment for me was watching Al Gore’s first film. I realised I could make a difference by helping people help the planet.
A lot of my money is in our mid-cap fund (laughs). My super and my personal assets are in there because that’s where my values lie.
Starting this business I suppose, about 13 years ago, and just understanding that I could break away from traditional financial services. I’d encourage advisers who consider moving into ethical investment to do it. There’s better work-life balance and there’s great satisfaction in influencing and changing things like water scarcity and energy efficiency. It’s unbelievably rewarding.
This article was published in The Australian Weekend
