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Growing concern about a range of environmental and social issues is fuelling a rise in ethical investing in Australia. Here’s a look at this fast expanding sector.
For many personal and financial reasons, a growing number of investors are seeking to apply an ethical lens to their decision making.
For some it’s about using their funds to drive change on issues like the climate, animal cruelty or human rights abuse. For others, the motivation is financial; they recognise the risk to long-term financial value posed by certain environmental, social and governance issues.
Ethical investing specialist Louise Edkins CFP® says recent events have spurred investors to demand more ethical and sustainable options.
“I think there’s been some introspection during COVID-19, and the bushfires before that also got people quite galvanised,” she says. “People also see that there are risks with some standard investments, like coal and oil, as your investment may underperform or go down based on that exposure.”
It seems like those ethical investors could be right. The Responsible Investment Association of Australasia’s (RIAA) latest benchmark report found responsible investment funds outperformed mainstream funds over every time horizon. The trend appears to have accelerated since early 2020, prompting KPMG to comment that RI funds “provide greater resilience and better manage increasing volatility in a changing world”.
Which approach to ethical investing?
Sounds good, but what exactly is ethical investing? It is the same as responsible investing? What about impact investing? Or sustainability-themed investing?
Start researching the topic and things get murky, fast. That’s because there’s no standard set of rules or regulations that govern what an ethical investment is. Instead, you’ll find a wide range of approaches that prioritise different outcomes.
Ms Edkins says she often sees a disconnect between what people expect, and what’s being offered to them.
“Most of the Australian investment market falls into the category of ESG, which is really about risk,” she says.
“The ethical investor tends to be someone who wants to go a bit stronger than that. They want to invest in, or avoid, certain industries in line with their values. They often also want to actively be part of the solution through their investments.”
She says clients come from all walks of life. The common thread is a belief that ethical investing allows them to take tangible action on social and sustainable issues.
“Money has the power to influence and many people feel disempowered by the politics of the day, but through ethical investing, they can take personal action that is more than just consumer choices.”
What is ESG investing?
ESG integration is by far the largest and most common approach used by ‘responsible investment managers’ in Australia. The RIAA says 87 per cent of the ‘responsible investing’ market in Australia, some one trillion dollars’ worth, use ESG integration as their primary approach.
Critics of ESG investing argue that it’s not really ‘ethical’, as the focus is on financial returns, rather than being driven by ethical considerations. For example, an ESG approach doesn’t specifically include or exclude anything – all investment opportunities can be considered. That’s problematic for ethical investors looking to avoid certain industries or sustainability themes altogether.
On the other hand, supporters of ESG argue that by remaining engaged with companies, rather than avoiding them, they can take an advocacy role and help drive changes in behavior, whilst still prioritising returns. This can be especially important in industries where major reform is needed.
The importance of research
Which approach is right for you will come down to your values, motivations and goals. But one thing is for certain, investors will need to do their homework and understand what they’re really investing in, before committing any funds.
To help investors compare ethical banking, superannuation and investment products, the RIAA has developed a certification program, together with a Responsible Returns tool.
If you’re interested in making ethical investments, will you pay higher fees? Ms Edkin says you often get what you pay for when it comes to ethical investment advice.
“It doesn’t have to cost more, but there will be some products that have a higher fee because of the extra work involved in researching the ethics of those investments,” she says.
How can I invest ethically?
The easiest way to access ethical investments is through a financial advisor who specialises in ethical investing. They can help you develop a financial plan that takes your values into account, and find the right investments to also meet your long-term financial goals.
If you do want to do it yourself, there are several options. Look into ethical superannuation funds, managed and exchange traded funds, or consider buying and selling shares directly.