Investing gets a bad rap. We think of the stock market as reserved for the financially literate and the greedy who have no concern for our people or planet. But investing is actually one of the most effective ways to make a real positive impact, and you don’t have to be a hedge fund manager to get started.
What is ethical investing?
Ethical (that is, responsible, sustainable and socially conscious) investing is about making investment decisions that align with your morals, values and belief system. The specifics of an ethical investment strategy will vary person to person, but in simple terms, it’s about voting with your dollars by investing in responsible businesses and receiving a financial return.
How do I get started?
As long as you have money to invest, you can get started. Like companies and fund managers, you can embrace a responsible investment strategy by deciding to incorporate environmental, social and governance (ESG) factors into your future investment decisions. Some of the most common factors you might want to explore include:
- Environmental: climate change, resource depletion, waste, pollution and deforestation.
- Social: Human rights, equity, diversity, child labour and human rights.
- Governance: corruption, executive pay, tax strategies, board diversity and structure.
Start with your super
Start where you can make the greatest impact with your money. As a young Australian, your biggest shareholdings are likely to be in your superannuation. Super funds will soon own half of the Australian sharemarket, so the importance of where we choose to put this money can hardly be overplayed. This is likely where you will be able to make the largest contribution to shaping the way companies operate.
Check where your super is invested by reading the product disclosure statement (PDS) and find out how your fund is approaching ethical investing. Your super is not automatically invested in ethical options. Look for their ESG framework, which will communicate how the fund decides where to invest your money based on the environmental, social and governance criteria. It’s worth noting that some super funds labelled as “ethical” still invest in fossil fuels and weapons manufacturing. The practice of “greenwashing” (misleading investors by exaggerating their commitment to responsible investing) is rife, so it’s well worth doing the digging.
Be clear about your “sin stocks”
Be clear about the companies and industries you’re not willing to support. It could be those involved in animal cruelty, human rights abuses, gambling, alcohol, tobacco, firearms and fossil fuels for example. Make a stand by taking these non-negotiables out of your investment portfolio. By channeling your money away from these business activities, you play a significant role in creating a better future. Many super funds will already have their own list of “sin stocks”, so check out their Corporate Social Responsibility (CSR) information on their website.
Read up and research
As with any investment, it’s still important to manage risk and maximise returns when integrating ESG factors into your investment analysis. Some key things to consider:
- Actively seeking out companies that are trying to make a difference in areas that are important to you. These could include companies in the renewable energy, education or health care sectors. Look for companies that focus on solving some of the world’s biggest challenges and have impact at the core of their mission.
- Find out what sort of relationship the company has with its customers and staff. How do they treat them? What is the company culture like? Access resources like Glassdoor for employee reviews, and find out whether companies are B Corporation certified.
- Look at the company’s leadership team. Start with the C-suite (CEO, COO etc) and look at how they are paid (renumeration report), and how governance is managed (auditor’s report). Look at reputable media reports for indications on how they treat their shareholders.Fees, fine print and financial risks and returns. Take a close look at all of the product documents to understand the fees and how your money will be invested. High-risk investments tend to have higher returns, but because they’re risky, they can also lead to losses in the short term. Low-risk investments, on the other hand, tend to have consistent but lower returns. You need to consider your risk appetite to determine what mix of investments is best for you.
- Look for opportunities to invest in companies that are currently underperforming in ESG factors, but are investing to improve their approach. This can indicate future value creation and therefore potential share value and possible returns.
Take an active approach to stewarding your money that is already invested outside of your super fund in a managed fund, Exchange Traded Funds (ETFs) or as individual share holdings. Encourage the companies that you have shares in to improve their ESG and sustainable business practices. Keep informed about how they are currently approaching ESG factors and what their plans are for the future. As a shareholder, you can formally express your approval or disapproval by voting on specific ESG issues. If you need more information on how your shareholder company is handling and disclosing such issues, go to their website or contact them directly.
Am I going to miss out on the returns?
The perception that choosing to ethically invest means losing out on returns has been debunked over the last couple of years. Research now says the opposite is true; ethical stocks and funds have been outperforming their mainstream counterparts. And as investors are increasingly attracted to ESG funds, the quality and availability of ethical investing continues to grow.
While COVID-19 has placed additional pressure on returns, done well, ethical investing is a smart future-proof choice. If you’re looking for a long-term investment, you don’t want to invest in companies or industries that will be on the way out in five or 10 years, such as fossil fuels.
If you are passionate about investing in businesses that support the future, let your dollars do the talking. Where you choose to invest your money has a real impact on incentivising responsible companies, and that knowledge is worth every penny.
Liz McLardy is a financial wellbeing practitioner specialising in financial education for women. For online consultations visit lizmclardy.com.