What is Ethical Investing, and Does it Pay?

With growing concerns about climate change and other environmental and social justice issues, more and more investors are considering ethical investment options.

It goes without saying that everyone wants to see their super fund produce a good investment return every year.   However, if you feel uncomfortable with your savings supporting activities like coal mining, gambling, or exploiting employees in third-world countries, it might be time to consider a responsible investment (RI) option.   

To help you align your personal values with your investment values, we thought we’d try and break down some of the key terms you may come across as you explore your options.

What You Need to Know About Ethical Investing

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 mean.

What is 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.

Responsible investment (RI) is a process that takes into account environmental, social, governance (ESG) and ethical issues during the investment process. Traditionally, investment funds only considered financial issues like future performance when they selected an investment asset.

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, but all these phrases can mean different things to different people.

How does responsible investing work?

The most common way investment managers adopt a responsible investment approach is to ‘screen’ potential investments.   A ‘screen’ can be to either exclude investments (negative screen) or only include investments (positive screen).

Negative screening generally excludes investment in companies, industries or even countries involved in specific activities (e.g. tobacco, gambling, pornography, animal testing or fossil fuels).  A positive screen might also help an investment manager select companies delivering products and services that have a positive impact on society and the environment (e.g. renewable energy).

RI or ethical investing means different things to different people. For some, the key issues are ‘clean and green’ concerns about fossil fuels or uranium, while for others, gambling or employee safety is important.  You should consider what responsible investment issues are important to you to help inform your investment decision making.

What is ESG?

ESG is an acronym that stands for Environmental, Social and Governance and it applies to a range of investment approaches and outcomes. Considering ESG issues when selecting and owning an investment asset means looking at how the company or investment asset deals with:

• Environmental issues (such as pollution, climate change, water or other resource scarcity)
• Social issues (such as involvement in local communities, their employees, health and safety)
• Corporate governance issues (such as business ethics, strong boards and appropriate executive pay)

What sort of ethical investment options are out there?

You can see from this article just how broad and complex responsible investing options are. But 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 investment in all their activities, while others will offer some responsible investment options as part of their range of investment products and services.  Defining and measuring how investment managers integrate responsible investment (RI) practices into their investment methodologies is complex.  It is often hard to find the information you need on public websites too.

So, like all matters financial it’s best to speak to a professional to understand your options.

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

This is a fair question given the billions of dollars of profits made from gambling, tobacco, transportation, coal and many unethical or non-renewable assets.

And many investors assume they will get a lower return on their investment if they choose ethical because there might not be as many options to pick from.  But we can assure you that your financial future won’t be compromised in any way by making responsible investing choices.

There is growing 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. And in their Benchmarking Impact report released in September 2020, the Responsible Investment Association of Australia (RIAA) found that 92% of surveyed investors say their impact investments are meeting or exceeding expectations.

How can a financial adviser 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.

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 advisers, like Muirfield Financial Services, have been advising clients on the ethical element of their financial plan.

And 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.

Discover more about what a Certified Financial Planner® like Muirfield can do for your investment plans.

And feel free to give us a call on 1300 242 700 to discuss how ethical investing can become a staple on your path to retirement.

We have offices in Geelong and Torquay and help clients right across South-West regional Victoria plan for retirement.