Our guide unpacks what ethical investing means and helps you decide if ethical investing is right for you. Read on to find out about a range of options to investing ethically and the factors that are helpful to consider when looking for ways to grow your wealth in a way that aligns with your priorities and values.
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Is Ethical Investing Right For Me?
Ethical investing will resonate with those who think carefully about the impact of their spending decisions – both positive and negative – and are drawn to supporting businesses that align with their values as consumers.
This might be you if you are already making choices to purchase products or services from businesses with strong social, environmental and governance credentials. You understand that there is power in spending decisions and are interested in supporting businesses that align with your personal values, whether that means investing in companies that are committed to sustainable manufacturing practices or local production, have a diverse leadership and workforce, or focus on meaningfully giving back to the community or supporting a great cause.
In the same way that many consumers are moving towards conscious consumption and make purchasing decisions to buy the “why” behind a brand or business, there is a strong trend towards engaging more with how investment choices align with personal values and make an impact in the world.
By choosing ethical investment investments, you are voting with your money to support companies with sustainable and responsible practices, and can play a role in driving meaningful, long-term change. So let’s unpack what ethical investing actually means and some of the key considerations to work through before diving in.
“Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.” MARGARET MEAD
What Is Ethical Investing?
Ethical investing (also known as responsible or sustainable investing) aims to bring a holistic approach to investing, where social and ethical issues are weighed up alongside financial performance when considering a specific investment option or strategy. It could mean avoiding investment in certain industries or proactively supporting companies working towards making a positive impact by selecting specific investment choices that align with your personal values.
There is no universally accepted definition of ethical investing, which by its very nature is a subjective concept determined by the criteria that resonate with your personal values and p
riorities as an investor. In the absence of a uniform understanding of what is captured by the term ‘ethical’, it is up to individual investors to do the legwork and work out whether a particular entity or fund meets our standards. For some, excluding certain industries they find objectionable from their portfolio is paramount, while others may focus on the governance and conduct of companies when it comes to diversity in the leadership team, labour rights or the protection of personal information and data.
According to the Responsible Investment Association Australiasia (RIAA), some generally accepted strategies that professional fund managers use to identify suitable ethical investments can include one or more of the following considerations:
- ESG integration: Environmental, social and governance considerations underpin an ESG-driven investment strategy. This means a strong focus on environmental impact (energy use, waste management and carbon emission), social outcomes (health and safety regulation, worker conditions, payment of fair wages, and commitment to protecting human rights) and governance arrangements (level of community engagement, company transparency and disclosure, conflicts of interest, board independence and management quality).
- Corporate engagement and shareholder action: Shareholders use their position to influence corporate behaviour or activities, to positively encourage and contribute to a progressive and sustainable business model.
- Negative/exclusionary screening: Investors specifically choose to exclude certain industry sectors from their portfolio, including for example, companies that promote tobacco use, gambling or the sale of weapons and firearms; engage in activities involving fossil fuels or environmental degradation; or have a poor human rights record or are otherwise involved in exploitative practices.
- Positive/best-in-class screening: This strategy involves investing in companies or projects with strong ESG performance relative to their peers. Businesses that make the grade are likely to have a strong commitment to ethical and social values, with a focus on the production of sustainable goods and services.
- Impact and community investing: Investors look for positive social, environmental or community impact. This could include investments in companies that support women-led businesses, empower or give back to local communities, or help solve specific social or environmental issues.
What Do I Need To Consider When Choosing Ethical Investments?
There are a range of factors to consider in deciding whether ethical investing is right for you, as well as the specific approach you might choose.
Identify your values and preferences: Identify the ethical, social or sustainable areas that are most important to you and do your research to ensure that any future investments support those objectives. Remember that there may not be a perfect option, but it is certainly helpful to know your priorities before you get started.
Understand the specific offer: Being clear on what you want, and putting in the legwork to understand what is included or excluded with a particular investment option, will help ensure that your money is working for you in a way that aligns with your values and life purpose. You can get across the detail and make choices that work for you by taking the time to read the fine print and asking questions to understand how your money will actually be invested.
Check that the claims add up: Many companies recognise that “doing good” is good for business, and are working to implement real and verifiable changes to meet ESG standards. Moreover, as professional fund managers and individual investors increasingly choose ethical options, there is also pressure to step up and operate responsibly, or be left behind. In the absence of robust regulation, however, it is important to be conscious of the risk of ‘greenwashing’ and checking that companies are delivering on lofty promises. Diving in and doing some of your own research is the best way to ensure that impressive sounding claims are actually supported by facts.
Performance: While the objectives of ethical investing are to support companies that align with your values, at the end of the day it still needs to turn a profit and make good financial sense. Remember that you are looking for a solid return on your investment in order to grow your wealth, build towards your financial objectives, and save for a comfortable retirement. As such, you need to feel confident that the particular ethical investment option you are contemplating is underpinned by a solid business or fund, with strong prospects for growth and returns.
Fees and costs: In addition, you should verify that the fees and costs you will be paying are competitive compared to other similar options, evaluated in the context of overall returns.
How Can I Invest Ethically?
Ethical investors in Australia have a range of options available to them. Of particular note, the principles of ethical investing can be applied when selecting individual shares, exchange traded funds (ETFs), managed funds and super funds.
Individual shares allow you to build your own bespoke ethical portfolio that is perfectly tailored to your values. While this option gives you the most control over the composition of their investments, it can be a time consuming process to research individual companies and will require some deep-diving into annual reports to verify company claims, performance and credentials.
ETFs are another option to consider if you want a simple and flexible way to spread out risk by investing in a basket of shares. Many of the large ETFs available in Australia offer ethical options, where a particular fund screens out certain companies that engage in activities which do not align with ESG principles. What funds include or exclude through their ethical screens can vary significantly. As such, you will need to do your due diligence and be clear on what criteria a particular ETF uses to define ethical or responsible investing, and the specific companies that are included in their ethical funds.
Managed Funds can also provide a straightforward option to diversify your portfolio in line with your ethical vision. You can choose to invest in managed funds with a focus on ethical investments, as defined and selected by the fund manager. You will need to review information provided by the fund to understand their ‘take’ on the meaning of ethical investing, and the list of companies that make up the particular fund’s holdings.
Super Funds offer ethical or sustainable options for those looking to growing their retirement nest egg while supporting positive change. In addition, there are some dedicated ethical superannuation funds in Australia that bring an ethical lens to their entire suite of investment options (Australian Ethical, Future Super and Verve Super are some examples). As is the case with other investments, it is important to verify that the class of assets that make up a particular super option aligns with your ethical investment philosophy by reviewing the relevant list of holdings.
With each of these options, you need to consider the performance of a particular product or fund over recent years, as well as how they align with your overall investment strategy, investment timeframes and comfort level with risk. This means reading the product disclosure statements, understanding the holdings that make up an offering, and being clear on the applicable fees and charges. Where appropriate, it can be helpful to talk to a qualified financial adviser to work out the best options to suit your specific situation.
The Big Picture: What Is The Future Of Ethical Investing?
Ethical investing continues to grow in popularity and is now considered mainstream rather than niche. The RIAA Responsible Investment Benchmark Report published in 2022 found that $1.54 trillion of assets in Australia are now managed through responsible and sustainable investment options, accounting for 43 per cent of all professionally managed funds.
While climate continues to be a strong theme for both positive and negative screening, an emerging positive screen topic for the reporting period was gender diversity and women’s empowerment, as well as the support for human rights. Moreover, the Report notes that an increased focus on sustainability-related investment themes like biodiversity and nature reflect greater sophistication in considering the complex interactions between investment and the natural environment.
The demand for responsible investment options is driven not only by individual investors but professional fund managers who recognise the need to respond to the needs of their members, many of whom expect greater alignment between their values and the economic, social and environmental outcomes of their investments. As a result, in Australia, nearly half of professionally managed money is now classified as ‘responsible investment’.
When it comes to personal choices that make an impact, Australian millennials are the most likely group to prefer to invest in ethical companies and responsible super funds, with women indicating a greater preference and expectation around their money to be invested responsibly and ethically. This trend is also reflected overseas, with US studies showing that women are more likely to invest according to their values and in a way that will benefit their families, community and the planet.
According to a 2020 US survey on the psychology of investing, women are more committed to a responsible investment strategy and are much more likely to consider the social mission of a company in their evaluation of a particular investment option. It is therefore not surprising that women are responsible for the significant growth in sustainable investment in recent years.
As women continue to earn more and find themselves in control an ever growing share of total wealth, they are investing at higher rates than ever before, with much of this money directed towards ethical investments and meaningful change.
This trend is reflected in a recent ASX Investor Study which found that while Australian investors are currently predominantly male (58%) and middle aged, the next few years are set to see a growing number of women and younger Australians actively investing. In the 12-month reporting period, 45% of those who began investing were women, and their participation is expected to increase, with women accounting for 51% of those intending to invest in the near future.
Final Thoughts: Does Ethical Investing Make A Difference?
Arguably, there is a strong case for building wealth – in accordance with your heart and conscience – so that your money can do good for people and the planet. However, the devil is in the detail, and you need to do your research to make sure that an investment option aligns with your values and expectations.
With the financial power and influence of women expected to grow in coming years, it is clear that women’s investment decisions will continue to have a meaningful impact on how companies consider ESG issues and the ethical investment landscape. As a group, women investors are in a position of having real power to continue to be a force for positive change.
Like to deep dive and find out more? The Ethical Investor by Nicole Haddow is a great read and offers an excellent, comprehensive guide to investing for an ethical and sustainable life. Read our review here.
This information is intended to be of a general nature only and should not be treated as specific investment advice on any particular matter. You should seek professional advice that takes into account your own personal circumstances before making any financial decisions.
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