Ethical investing is the practice of choosing your investments based on your ethical or moral principles. Ethical investing is now increasingly popular, with some investors seeing ethical investment choices as a minimum threshold requirement. The landmark annual study from the Responsible Investment Association Australasia (RIAA) ~1 has found that the market for responsible investments in Australia has continued to soar in popularity to $1.2 trillion in 2020, with responsible investment assets growing at 15 times the rate that overall Australian professionally managed investments have grown.
The good news for ethical investors is that this moral choice is proving to be good for the planet and for the bottom line, with ethical investment products often outperforming many other traditional investments. In 2020, responsible investment international share and multi-sector growth funds performed on par with, or better than, the market, even though overall fund performance was down largely due to the impact of COVID-19 on economies worldwide.~2
This drive for positive change (environmental, social and governance (ESG)) is coming from all angles. Consumers are choosing ethical products and services which is driving organisational leaders to focus more on social, environmental, and ethical responsibilities. Investors are demanding that their investment money is making a positive impact, or at least, that it is not contributing to any negative impacts, irresponsible or unethical business practices. The government is introducing more regulation and policies around ethical and environmental behaviour, which is putting significant pressure on many industries to change their practices and comply.
How do you know if you are investing ethically?
As the ethical investment funds space is growing substantially, investors are faced with the challenge of, for example, deciphering the truly green from the ‘green-washed’ investment choices.
There are several approaches to choosing ethical investments including:
- ESG Integration
ESG integration means that ESG is measured within your portfolio along with traditional financial analysis. If you already have an investment portfolio, it is a good idea to review how the overall portfolio rates in terms of ESG. For some investors, it may only need slight tweaks to ensure ESG integration within their portfolio over time. We suggest talking to your financial adviser about how your portfolio rates in terms of its ESG score and if there are changes you can make to bring it in line with your values over time.
One way to re-balance your portfolio could be to focus on selecting ethical companies only or excluding companies that do not align with your personal values. This is known as positive or negative screening.
Positive screening is actively seeking out and aligning your investments with causes you believe in. This could include affirmative environmental programs such as renewable energy programs including solar, wind and biofuels, medical research, education, and sustainable practices in food production, agriculture, water treatment and waste management including plastic reduction, recycling, and carbon trading.
Negative screening aims to ensure your investments are not inadvertently supporting something that is not aligned to your values, such as coal seam gas, tobacco, gambling or deforestation and pollution. This also includes companies that underpay employees, breach modern slavery via their supply chain or ignore community concerns.
A themed approach is for investors with a special interest or passion for a particular cause (more often environmental). As an example, a themed approach may see investors specifically seeking out renewable energy investments.
The impact investing approach refers to investors with a long-term goal of solving the world’s biggest social and environmental challenges and hence will want to invest in research and development or breakthrough technology. The corporate advocacy investment approach relies on shareholders to take a more active approach in influencing corporations to act responsibly.
Investors are constantly being bombarded by companies that say they are ethically minded and environmentally friendly, but at a closer look, it’s a completely different story. It is vital to look at the company on face value, but also that they are practising what they preach when it comes to what they are investing in as an organisation.
It is important to consider several different indices for measuring ESG and to compare before you begin your journey into ethical investing. We recommend seeking professional advice to guide you on this journey.
What are the options when it comes to ethical investment products?
As a result of improved technology, customer preferences and government regulations, it is becoming easier to make ethical and responsible choices.
There are a range of ways in which you can invest ethically, both inside and outside superannuation. These could include managed funds, ETFs or direct investments (shares).
Super Funds – There have been significant changes for superannuation funds over the past couple of years in terms of their responsibilities to their members. There is more transparency than ever before on what a super fund is investing in for its members, and its overall investment performance. See our article on the recent APRA Super fund performance test results.
As far as ethical super funds are concerned, the RIAA (Responsible Investment Association Australasia) regularly reviews the performance of a range of super funds to identify what they deem to be the leaders in responsible investing. This not only provides a benchmark on a range of criteria relating to social, environmental, governance and ethical issues but also looks at whether they are delivering long-term, risk-adjusted performance outcomes. RIAA recently highlighted several super funds they deemed as leaders in responsible investing. These included Australian Ethical Super, Australian Super, Care Super and Aware Super to name a few. ~3
Managed Funds – there are a number of managed funds which have positioned their strategy to focus on ethical investment options, these include Robeco, Impax and Australian Ethical.
Exchange Traded Funds (ETFs) – ETFs can be screened and rated in terms of what they offer from an ESG perspective. Be aware that in some cases, ESG is being used as a marketing tool to promote one ETF over another, so we strongly recommend some deep diving if ESG is the main priority of your investment choice when it comes to ETFs. Canstar rated BetaShares’ Global Sustainable Leaders ETF and Vanguard Ethically Conscious International Shares Index ETF as their top 5 Ethical ETFs in a recent review.~4
Direct investment – Shares – Another ethical investment option is to buy shares in companies you feel are aligned with your values. Again, consider the need to select the most appropriate shares for your situation based on your investment budget, as well as those that align with your values and that you believe will deliver the kind of financial outcome you are looking for over time.
Getting started on the journey to ethical investing
When you embark on the decision to invest for a better tomorrow, it is important to consider not only the ESG value of the investment but also the past performance, fees and ease of portfolio management. Ensure you go in with your eyes open, think of the long-term benefit financially as well as ethically.
To get started, a useful online tool created by RIAA is the responsible returns comparison tool, which helps you search, compare, and choose ethical super and investment products. https://www.responsiblereturns.com.au/search
We recommend seeking professional advice to ensure you find the products that fit with your personal values, your budget and your overall investment goals. It is certainly a positive time, when we can consider investments that will benefit more than just your bottom line.
At Tribel, we are strong advocates for building an ethical path when it comes to creating investment portfolios for our clients. We seek to empower our tribe to invest in line with their values and build a better tomorrow.
Contact one of our Tribel advisors to discuss your unique situation.