How to invest ethically

Ethical investing involves using your ethical principles to filter and guide your investment decisions. The practice has been around for more than 30 years in Australia, and has started to gain significant traction in recent years.

If you’re looking to make some, or all of your investments ethical, it can be tricky to know where to start. There’s no standard rules or requirements that govern what constitutes an ‘ethical investment’ in Australia. Many products market themselves as being ‘ethical’, ‘sustainable’ or ‘green’; yet, their ethical credentials vary widely. That’s why it’s essential to do your own research and understand what you’re investing in, before committing any funds.

To help you get started, here’s an overview of some of the most common ways to invest ethically in Australia.

Managed funds and ETFs

One of the ways you can get exposure to ethical investing is through a managed fund, or an exchange traded fund. There are many funds available in Australia that claim to have ethical, sustainable or responsible investment credentials.

The vast majority of these funds use an approach known as ‘ESG’ investing. This is a type of investing that assesses a company’s financial performance, along with its exposure to environmental, social and governance (ESG) risks and opportunities. While the method is widely used, some critics argue it’s not ‘ethical investing’ at all, as the focus is on financial returns, rather than being driven by ethical considerations.

If an ESG fund appeals to you, make sure to research the underlying holdings in the fund, as well as the ESG screening criteria, to find out if they’re in line with your values. Alternatively, if you prefer a stronger stance, you can look for a fund that goes beyond ESG, to proactively include or exclude certain investments.

Through your superannuation provider

Many mainstream superannuation providers now offer ‘ethical’ or ‘sustainable’ investment options, alongside their other funds. For the most part, these are ESG funds, while some also use various levels of screening to exclude certain industries or investments.

There are also a handful of superannuation funds focused solely on ethical investing, including Future Super, Australian Ethical Superannuation, and Verve Super. These funds claim to apply a much stronger ethical lens to their investment selections, using both negative and positive screening to actively exclude, or seek out, companies that fit their ethical criteria.

If you’re interested in investing your superannuation with one of these funds, make sure you do your homework to understand what is, and isn’t, included. Read the PDS and look at the top shareholdings of each fund, to get a feel for the types of companies they hold. You can also check their LEAF rating from the Ethical Advisor’s Co-op, which offers an independent analysis of the major funds.

Self-managed superannuation fund (SMSF)

If you’d prefer to take a stronger stance on ethical investing, or the products available from superannuation providers aren’t right for you, you might consider a self-managed superannuation fund. An SMSF gives you greater control over, and transparency around, how your assets are invested.

Keep in mind that setting up and running an SMSF can be more expensive than a regular super fund and comes with strict legal obligations, duties and responsibilities. You’ll also need to have enough time and the knowledge to manage your investments. You should always seek the advice of a financial planning professional to help with managing your SMSF.

Build your own investment portfolio

If you prefer to ‘do it yourself’, you can invest directly by purchasing shares in companies that you believe to be in line with your values. You’ll need to do your own research, but the process of analysing companies to invest in may help clarify what’s most important to you when it comes to ethical investing.

Working with a financial advisor

If you’re serious about investing ethically, it’s worth seeking the advice of a financial planning professional who specialises in the area. An ethical investing specialist can help you develop a financial plan, make product recommendations and ensure that your investments not only align firmly with your values, but also meet your long term financial goals.

There’s no shortage of choices when it comes to ethical investing, and it’s a personal decision as to what’s right for you. Make sure to consider your values, your financial goals and the level of risk you’re comfortable with, before making any investments.

Source: Money & Life

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