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The ins and outs of ethical investing

With growing concerns about climate change and other environmental and social justice issues, more and more investors are opting for ethical investing. Discover some of the key terms you may come across as you explore the options so you can really understand how your money is making a positive difference.

 
Money & Life team

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future

Consumer research shows Australians are big fans of going ethical with their savings and investments. According to the Responsible Investment Association Australia (RIAA) From Values to Riches 2020 report the majority of Australians expect their savings (87 per cent) and their super (86 per cent) to be invested responsibly and ethically. Three-quarters would consider moving their banking, super or other investments to another provider if they found out their current provider was investing in companies engaged in activities at odds with their values.

Some ethical investing definitions

In the investing world, taking a more ethical approach is also catching on. According to the RIAA report, assets managed in accordance with responsible investment principles now represent 44 per cent of the $2.25 trillion in professionally managed assets here in Australia. Five years ago, it was just 17 per cent.

But with this growing number of ethical investment options available and so much jargon to get your head around, it can be tricky to understand whether your investments really match up with your values. To start with, it can help to understand what some of the words used to describe ethical investing actually mean.

– Responsible investing

While the term ethical investing is a popular one, responsible investing is the more common language used in the financial services industry to talk about investment approaches that take seriously their responsibility for society and the environment.

The United Nations Principles for Responsible Investment (UNPRI) offers the following definition of Responsible Investing.

“The PRI defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership. 

As well as having the potential to offer investors a good return from companies that are taking stock of ESG factors in how they operate, responsible investing can also contribute to the stable social, environmental and economic systems we all depend on for our livelihoods.

Many people may also use the term sustainable investing instead of responsible investing and all these phrases can mean different things to different people. Responsible investment is perhaps a more universal term, as the UN has put forward the Principles for Responsible Investment as a global standard for incorporating ESG issues into investment practice.

– ESG

ESG is an acronym that stands for Environmental, Social and Governance and it applies to a whole range of investment approaches and outcomes. So when someone describes an investment as being managed or screened for ESG, this can mean many things. The Responsible Investment Association of Australia (RIAA) provides an explainer to help you understand the different way that ESG screens, benchmarks and the criteria that might be used in responsible investment.

– Impact investing

Impact investing is quite different to using ESG criteria to decide where to invest your money. These are investments made to generate a positive social and environmental impact that can be measured, as well as a financial return. As with ESG, there can also be many different types of impact and ways of measuring it. The Impact Management Project provides more information on impact management and some simple measures of impact performance.

What sort of ethical investment options are out there?

In explaining these terms, we’ve given you some idea of just how broad and complex responsible investing options are. So if you want to invest your super or savings in a way that matches your values, where do you start? What you’ll find is that there are some companies that take a responsible approach to investing in all their activities, while others will offer some responsible investments options as part of their range of investment products and services.

Australian Ethical is an example of a company that has strived to invest responsibly. Since 1986, they have followed the same ethical charter that supports their whole business investment approach.  “Our charter doesn’t tell us what to screen out,” says Leah Willis, Client Relationships Manager at Australian Ethical. “Instead it’s about a more responsible way of investing for positive outcomes and to avoid harm. We apply this approach across three major pillars – people, planet and animals.”

So choosing a single provider that applies an ethical lens to all their investments is one way to go. But if you’re interested in choosing from a wider range of products and options for your banking, super and investments, here are a couple of places to start with finding products that have been researched and rated by experts:

– Responsible Returns – an initiative of the RIAA, Responsible Returns offers you a way to search and compare over 200 certified responsible investing products. Start your search by selecting the ESG themes that interest you and any industries or activities you want to avoid. Then you can choose whether you’re looking for super or banking products to arrive at a list of options.

– Ethical Advisers Co-op ratings – for investors looking at ethical or responsible funds where they can use their money to grow wealth, make a positive impact and avoid harm, Trevor Thomas CFP® from Ethinvest recommends starting with the Ethical Advisers Co-op ratings. “This is a rating page for all the major ethical funds to make sure the underlying investments are doing what the screens suggest they should be doing,” says Trevor. “You get a two-pager on the fund and why they’ve got that rating.”

Can I still expect a good investment return from ethical investing?

As a financial planner specialising in ethical investment for his clients since 1989, Trevor has seen a rise in demand for their services from investors as well as a wider number of options available. Another thing Trevor is seeing change investors assuming they will get a lower return on their investment if they choose ethical. He always ensures his clients know their financial future won’t be compromised in any way by making responsible investing choices.

“You don’t have to sacrifice returns to invest ethically,” he says. “We always compare our clients’ portfolios against the standard performance benchmark for all their assets. There’s no reason why a term deposit from a bank with an ethical screen should pay a lower interest rate than any traditional bank.”

In the wider world, there is plenty of evidence to support the fact that responsible investments can offer competitive returns. In 2019, Morningstar reported 65% of sustainable funds had performed in the top half of their respective categories[1]. And in their Benchmarking Impact report released in September 2020, RIAA found that 92% of surveyed investors say their impact investments are meeting or exceeding expectations.

RIAA’s consumer research also shows that public opinion on this particular myth is changing. In From Values to Riches 2020 they report that 67 per cent of Australians believe ethical or responsible banks perform better in the long term and 62 per cent of Australians believe ethical or responsible super funds perform better in the long term. Back in 2017, just 29 per cent of Australians held this belief.

How financial advice can help you invest according to your values

While Australians recognise the value of responsible investing, they also feel like they are in the dark when it comes to making informed choices. The RIAA report also found more than three quarters of Australians believe there is not enough independent information about ethical or responsible banking and superannuation funds available.

This is where professional advice can play an important role in guiding you to invest your super and other savings in ways that match your own ethical values and priorities. Many financial planners, like Trevor, have been advising clients on the ethical element of their financial plan for years. With the introduction of a new Code of Ethics in financial planning in 2020, all financial planners are now required to proactively understand their clients’ broader, longer-term interests. This means that your preference for investment options that support a sustainable future for our environment and society are going to be just as important to your financial planner as they are to you.

This article has been been reproduced from here.

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