Responsible and ethical investing

If you’d like your money to make a difference to the world as well as to your future, ethical investing may be for you.

Almost nine in 10 (89 per cent) Australians would prefer to invest in a responsible investment option that considers ethical, social and governance (ESG) issues as well as financial returns.

With responsible investments now accounting for $980 billion – or 44 per cent – of total assets professionally managed in Australia at the end of 2018, this preference is expected to continue increasing in years to come.

What is responsible investing?

Responsible investing takes into account environmental, social, governance and ethical issues, as well as financial performance, when selecting investments.

Funds that apply a responsible investing approach may screen out companies or sectors due to controversial or unethical business practices or negative social impact. This may include companies with a history of human rights abuses and worker exploitation, those that participate in animal testing, or those that sell harmful products including munitions and tobacco. This practice is known as negative screening.

Funds may also positively screen for companies or sectors with a stronger focus on sustainable practices relative to their peers.

Levels of responsible investing

Increasingly, fund managers are using a combination of responsible investing techniques, creating a range of options for customers seeking to align their own values with their investment risk profile.

In their purest form, ethical investment options, also known as dark green funds, take a highly restrictive approach, excluding any companies (and sometimes entire industries) deemed to be unethical.

Others, known as socially responsible, light green or sustainable options, don’t exclude entire industries outright, but invest in the most responsible businesses within each industry.

Whereas ESG and socially responsible investing looks to exclude investments based on negative or harmful activities, impact investing proactively seeks out businesses and funds to invest in that address environmental and social issues, for example, renewable energy companies.

Through impact investing, capital is provided to companies in the form of your investment, with the intention of generating a measurable, beneficial social or environmental impact, as well as a financial return.

How it can affect returns

A common concern surrounding responsible investing is that incorporating ESG factors into the investment process, or screening out certain companies, may compromise investment performance. However, recent research shows that assets under management using a responsible investment approach are outperforming mainstream funds over most time frames and asset classes.

It’s important to note though that many of these investment options are still relatively new and most haven’t been around longer than 10 years. This means their long-term performance is unknown at this stage.

Why choose to invest responsibly?

Aside from the possibility of a better night’s sleep knowing your money is supporting more responsible business practices, opting for a responsible investment option could be your chance to contribute to positive change in the world.

Australians are choosing to invest responsibly for a variety of reasons. These span from a desire to help the environment or to support a cause you’re particularly passionate about, to engaging and holding companies accountable for their actions, or simply ‘putting your money where your mouth is’.

How to check your investments

If you’re considering making the change to more responsible investment options, or if you’re keen to see how your current investments stack up, here are some steps you can take to get started:

  • Think about what ethics and values are important to you – everyone’s values are different so to begin with, you need to work out what’s most important to you. From here you can identify the areas you don’t want to see your money invested in, or perhaps investment products where you could put your money to make a positive impact.
  • Ask where your money is currently invested – many super funds or investment managers now have information about sustainability and ESG on their websites. This is a good place to start to find out how your money is being invested.
  • Do your research – there are now many responsible and ethical super funds, investment products and fund managers you can access.
  • Ask for help – if you need assistance finding out what you’re invested in or how to access more ethical investment options, please feel welcome to contact me.

For further information about responsible and ethical investing please contact us.

Source: AMP