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Yahoo Finance’s 5 minute guide to: Ethical investing

Ethical investing is an approach. Photo: Getty

The way people invest has changed – for the better.

Investors are waking up to the fact that their financial investments can help create a better world. Fewer investors are blindly allocating big bucks to anything they think will get them a big return without any regard for environmental or social impact.

They’re investing with their feet, aligning their personal values with their investments. Greater scrutiny of corporations and their operations, growing concerns about the environment, and the influx of younger, tech-savvy and values-led investors have all contributed to the ballooning ethical investment industry which now has a whopping $866 billion assets under management in Australia.

Also read: Why I left private equity to focus on impact investing

That figure represents more than half (55 per cent) of all assets under management in Australia, meaning an ethical approach to investing is now the new normal.

Why do it?

“Investment choices don’t just affect individual financial well-being,” Australian Ethical’s head of ethics research Stuart Palmer told Yahoo Finance. “They affect the future for us all and future generations.

“Ethical investing takes this into account by investing in businesses that can make a positive difference to society like healthcare, technology, and clean energy, and avoiding unsustainable ones like fossil fuel companies.”

Not only that, but ethical investors and shareholders can – and should – rightfully flex their muscles and send big corporations clear messages.

“Ethical investors also use their power to influence company boards and managers to carry on business more sustainably,” Palmer added.

“Australian Ethical, for example, has challenged banks not to lend to support an Adani Carmichael mine.”

This pressure forced Westpac to rule out lending to Carmichael in its latest climate action plan.

So what exactly is ethical investment?

CEO of the Investment Association Australasia (RIAA) Simon O’Connor defines it as “a holistic approach to investing, where social, environmental, corporate governance and ethical issues are considered alongside financial performance”.

In essence, it involves making investments that are conscientious – good for society and for the environment – without compromising financial returns.

How does ethical investing actually work?

It has a number of other names, such as ‘responsible investment’ and ‘sustainable investment’, but all of which have subtle differences.

“It’s important to understand the differences between each approach and whether that investment philosophy aligns with your personal values,” said Palmer.

It’s often done through positive and negative ‘screens’.

Negative screening involves excluding certain companies that engage in practices that are harmful to the environment or to society such as tobacco; weapons; forest logging; fossil fuels or carbon emissions; gambling; or have exploitative labour practices.

Also read: Why I left private equity to focus on impact investing

But negative screens haven’t been popular with all investors, some of whom have moved towards a more ‘positive’ approach instead.

Positive screening involves intentionally selecting companies that are promoting social or environmental sustainability. These companies could be generating sustainable or renewable energy; growing organic or fair trade produce; or engaged in sustainable environmental practices such as recycling, and clean technology.

What ethical investing is not

It’s not impact investing.

Impact investing can be thought of as the more gung-ho cousin of ethical investing: where ethical investing uses positive or negative screens, the objective of impact investment is to fund companies whose core mission of the business itself is to have a positive social or environmental impact in the world.

Also read: Welcome to The New Investors

It’s also not greenwashing. This is firms championing themselves as climate- or environmentally-friendly, but in name only. Often, this will come in the form of advertising or marketing language that is misleading. Consumers and investors should maintain a healthy level of caution, do their own due diligence, and ask questions.

How do I invest ethically?

Start with your super fund. You’ve got money invested even if you don’t think you have any investments. According to the ATO, more than 15.6 billion Australians have a super fund account. If you’ve got a balance above $0 in at least one superannuation fund, that money – your money – is going somewhere, and funding something.

“For many Australians, superannuation is one of people’s largest investments so it’s worth contacting your superannuation fund to find out what it invests your money in and how it approaches responsible investment,” said O’Connor.

Do some research and find out about your super fund’s ethical approach. If it doesn’t align with your values, it might be time to rethink where you’re putting your money.

“For example, is your fund is investing your money in tobacco and fossil fuels? Some funds have a dedicated ethical option that you can choose while others adopt a responsible approach across all their options.”

And if you’ve got a financial adviser, explore their knowledge of ethical or responsible investing, O’Connor advises.

Also read: 7 mega trends shaping the future of investing

“Tell them what issues are important to you and ask them if they can recommend some ethical and responsible investment products, ideally ones that have certified by RIAA as true-to-label responsible investment products.”

Educate thyself. Knowledge is power. There are now a number of resources that exist online that will inform you and help you make the right choice – start with the website of the investment company or super fund in question, and follow up with questions if the information isn’t already available online.

Beyond that, RIAA’s comparison website, responsiblereturns.com.au, directs ethically-oriented consumers and investors to RIAA-certified products.

“From investing in sustainable transport and education, to avoiding investing in human rights abuses and fossil fuels, Responsible Returns allows users to find, compare and choose from over 150 certified banking, superannuation, and investment products that have been assessed and verified by RIAA as delivering to their responsible or ethical promise,” O’Connor told Yahoo Finance.

Consumer-friendly websites such as Choice, Canstar and Finder.com.au also offer helpful information as well as comparison tools about investing, super funds, and apps.

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