It’s an investment approach that’s growing in popularity, but can ethical investing deliver the financial returns you need?
Every day, serious issues like climate change, oceanic plastic pollution and threats of species extinction appear on our news feeds. These global challenges are set to impact every area of our lives for years to come – including our financial security.
Overseas, heads of central banks have acknowledged the far-reaching impacts of climate-related financial risks. This year, England’s Mark Carney and France’s François Villeroy de Galhau both warned of the need to transition to a greener economy to avoid financial risks like infrastructure damage, reduced productivity and huge losses for insurers.1
Back at home, the Reserve Bank of Australia and financial regulators have recognised the economic implications of climate change, along with the need for financial institutions to make environmentally conscious investment decisions.2 Companies are also under increasing pressure from activists to take action on climate change and to tackle social issues like gender inequality.
As the challenges facing our world become more complex, many investors are demanding investment options that will make a positive global impact in line with their personal values. In fact, a recent study by the Responsible Investment Association Australasia (RIAA) found that 92% of Australians ‘expect their super and other investments to be invested responsibly and ethically’.3 But what does that mean exactly?
What is ethical investing?
Put simply, ethical or responsible investing is about avoiding investments in harmful practices or products. It can also mean choosing to invest in companies that actively make a positive social or environmental contribution.
As well as considering an investor’s financial goals, ethical investing takes into account the investor’s beliefs and values. Of course, everyone’s values are unique, so an investment strategy that’s right for one investor might not be suited to another. RIAA describes a range of ethical investment strategies, which can be broadly divided into two categories.4 The first category includes strategies that aim to prevent or minimise harm, such as:
- Environmental, Social and Governance (ESG) integration: ESG is a framework for evaluating a company’s environmental, social and governance practices before making an investment decision. This approach may include assessing how the company uses energy and deals with waste and pollution, how it treats its workforce and supply chain, and its track record with consumer protection.
- Negative screening: The most popular ethical investment strategy worldwide, negative screening means avoiding or divesting from harmful products and activities like tobacco, armaments, fossil fuels or gambling.
- Corporate engagement and shareholder action: This strategy aims to influence corporate behaviour. Shareholders might choose to attend board meetings, file proposals or engage in proxy voting to have a say in changing the company’s activities or operations.
The second category includes strategies that contribute to social or environmental benefits, such as:
- Positive screening: This approach involves selecting companies, sectors or products that have a positive impact on the world. This could mean investing in recycling or waste management companies, or businesses that produce plant-based proteins to avoid the cruelty of meat production.
- Sustainability-themed investing: With this strategy, investors choose companies whose activities focus on specific environmental issues. These might include organisations that generate renewable power, green technology or sustainable forestry.
- Impact or community investing: The aim of this strategy is to choose investments that benefit society while generating financial returns. Examples of impact investments could be community health, education or housing initiatives, or companies that help find employment for disadvantaged groups.
How do ethical funds perform?
Around the world, socially responsible investments rose by a staggering 34% between 2016 and 2018 to US $30.7 trillion.
In Australia alone, responsible investments were worth $980 billion as at 31 December 2018 – an increase of 13% on the previous year.5 There’s no doubt that ethical investments are popular. But how do they stack up?
According to recent data, they do well. As at 31 December 2018, responsible investment funds outperformed ‘mainstream’6 funds over one, five and 10-year periods across a range of asset classes (Australian share funds, international share funds and multi-sector growth funds).7
Ethical investing has the potential to deliver returns, and sustainable investment markets are continuing to grow across the globe.8 And as more of the environmentally and socially conscious millennial generation enter the investment landscape, ethical investing could continue rising in popularity over the long term.
The choice is yours
So how can you make sure your investments are aligned with your personal values? Your financial adviser can help you find the right strategy so you can invest in the things that matter most to you, without sacrificing your financial goals.
But first of all, it’s worth spending some time thinking about the issues you care about and the types of industries you don’t feel comfortable investing in.
Next, you can see which companies you’re currently invested in through your super, along with any managed fund investments and direct shares you may have. You can ask your fund directly for a list of your investments.
If you’d like to change any of your investments, you could also research some companies or industries that you’d rather put your money into.
Finally, get in touch with your financial adviser to review your investment plan together and discuss your decisions. Your financial adviser will be able to talk through your options and the potential pros and cons of any changes you’d like to make. By working together, you’ll be able to find the right investment strategy to match your needs, goals and values.
1 M Carney, V de Galhau & F Elderson, Open letter on climate-related financial risks, 2019.
2 RIAA, Responsible investment benchmark report Australia, 2019.
3 RIAA, From values to riches: Charting consumer attitudes and demand for responsible investing in Australia, 2017.
4 RIAA, Responsible investment benchmark report Australia, 2019.
5 Global Sustainable Investment Alliance, Global Sustainable Investment Review 2018, 2018, as quoted in RIAA, Responsible investment benchmark report Australia, 2019.
6 The term “mainstream” has been used to describe funds that don’t specifically apply a responsible investment strategy when selecting and managing their investments.
7 RIAA, Responsible investment benchmark report Australia, 2019.
8 RIAA, Global sustainable investment review, 2018.