The future of investing is ethical
How do you really know if your money is invested in weapons, fossil fuels or slavery? The ethical investing scene can be a bit confusing to the uninitiated, so here's a basic rundown of the different options that are available.
In today's world, people are increasingly aware of how their consumption choices impact issues like modern slavery, animal welfare and fighting climate change. But people may be unaware that how they choose to invest or save their money can impact the wellbeing of people, the planet and animals. So how do you know what you're investing in is having a positive impact and avoiding harm?
For most Australians aligning their superannuation and investments to their values is important. According to the Responsible Investment Association of Australasia (RIAA), nine in ten Australians expect their investments to be invested responsibly and ethically. Anyone interested in investment needs to be across the rising movement of ethical investing. For example, if you're a financial adviser, you're expected to manage your clients' needs – so ethical investing is relevant not only for clients who specifically ask about it, but also for those who might consider themselves quite ethical but may not know about the option is available to them.
RIAA's most recent 2018 Benchmark Report into the responsible investing sector notes that over half (55.5%) of Australia's professionally invested assets are responsibly managed. This includes funds that may consider to varying degrees, ESG (environmental, social and governance), exclusions, sustainability-themed and impact in their approach. So how do you cut through all this jargon?
"There is no doubt that navigating socially responsible investing is complex for consumers" says Leah Willis, Head of Client Relationships at Australian Ethical. "There isn't really an agreed definition of what responsible investing means so it is important for consumers to understand the differences so they can be sure that their investments line up to their values."
"With the rise in ethical investing in Australia we have also seen an increase in options available and more greenwashing which is confusing for consumers to cut through. A simple approach is to consider responsible investing as shades of green, from light touch to deep green. Australian Ethical's approach uses all the tools of responsible investment (broad positive and negative screening, engagement and advocacy) across all our options," Leah notes.
So how do you make sense of the different responsible options so you can be clear that your investments aren't funding something that compromises your own personal values? Below we outline the different approaches to responsible investing, the language used and what this means for your investments.
Traditional investing
So let's start from a broad position. Traditional investing is the status quo. This is how the mainstream financial sector has been investing for generations and approaches investing with an overriding focus on financial returns. Of course competitive financial returns are a good thing, but these returns may well be achieved through exposure (intended or not) to fossil fuels, weapons, animal cruelty, tobacco, gambling and human slavery, unless specifically excluded.
Broad responsible investment
This includes institutions that consider environmental, social and governance (ESG) aspects as part of their investment analysis. The rationale is that ESG factors represent a core driver of both value and risk in companies and assets. Even though ESG considerations are taken into account as part of the investment analysis, they do not necessarily exclude any sectors or companies on this basis. For example, the environmental risk posed by a company involved in coal mining may be considered as part of the investment process, but the ESG investor may still invest if they consider the current share price already reflects this risk.
Core responsible investment
Core responsible investment strategies are where people can be sure that their hard-earned money is being invested in a way that considers the broader societal impact of an investment. This is where exposure to investments that do harm is eliminated or minimised, and where the focus of the portfolio is in positive, future-building investments like renewables, healthcare, biotech and enabling technology.
Core responsible investment strategies have grown by 26% over the past year to $64.9 billion, according to RIAA. This comes as a result of consumers being more aware of their investments and not wanting to fund controversial or harmful sectors and companies.
These investment strategies go beyond ESG to include the following elements- (outlined in more detail in the subheadings further below):
negative screening
positive screening
sustainability-themed investing
impact investing and community impact, and
corporate advocacy and shareholder action.
How Australian Ethical invests: There are many labels to explain the different types of ethical or responsible investing, and it's fair to say that at Australian Ethical we apply them all. Every investment in our portfolio is screened against our Ethical Charter of 23 principles, which have remained unchanged for over 30 years. The breadth of our investment style means we cover positive and negative screening, support sustainable sectors, have an impact with our grants and sponsorships, and engage the community and government through our advocacy work. And our returns speak for themselves. For example, as at 30 April 2018 our flagship Australian Shares fund returned an average 12.5% pa for the last five years and 9.9% pa since it's inception in 1994.
Responsible Investment Association Australasia Benchmark Report
This is where an investment (or fund) won't invest in industry sectors, companies, practices or even countries, based on specific ESG or ethical criteria.
How Australian Ethical invests: We screen out companies that cause unnecessary harm to people, planet and animals. Some sectors and companies we exclude include manufacturers and distributors that generate their revenue from gambling, alcohol, tobacco, weapons, slavery, pornography and needless animal harm.
This is where an investment manager (or fund) will seek out investments that are in the sectors they want to support.
How Australian Ethical invests: We actively search for companies that make money doing things that we see as good for the planet, people and animals. These sectors include education, technology, public transport, healthcare, recycling and the new economy.
This focuses on investment in themes or assets specifically related to sustainability factors such as clean energy, green technology, sustainable agriculture and forestry, green property, or sustainable water supply.
How Australian Ethical invests: We do this across all our funds, as sustainability forms part of our positive screening process. For example, we've invested in businesses like Vesta's wind turbines, Osram's efficient lights, Shimano's bikes, New Flyer's electric busesand Herman Miller's sustainable furniture.
Impact investing and community impact
This style of investing targets investments aimed at solving social or environmental problems while delivering financial returns. It includes community investing where capital is directed to supply important goods and services to traditionally underserved people or communities, or financing that is provided to businesses with a clear social purpose.
How Australian Ethical does this: We deliver positive, tangible impact via our Community Grants program. We believe it's important for business to play a leadership role in making the world a better place, not just to make profit. That's why we distribute 10% of our yearly after-tax profits to charitable organisations and social impact initiatives through the Australian Ethical Foundation. Since 2000, we've awarded almost $2.5 million to not-for-profit organisations to kick-start or further their life-changing work for the planet, people and animals.
Corporate advocacy and shareholder action
This activity is about influencing corporate behaviour through direct engagement with senior management and/or boards, supporting shareholder resolutions, public advocacy and/or proxy voting.
How Australian Ethical does this: We actively advocate for change through corporates, regulators and government, internationally and in Australia. For example, we've engaged the government on why Australia doesn't need a Charmichael Adani mine, we've rallied G20 nations to stop fossil fuel subsidies, and we've continued to pressure the big banks to act better in terms of their ethics and corporate responsibilities. Read more about our advocacy work in our article, 12 ways we're advocating for a better world.
If you liked this article, you might be interested in reading our Financial Inclusion Action Plan.
This information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read our Financial Services Guide and the relevant product disclosure statement (PDS) available at australianethical.com.au. You may wish to seek independent financial advice from a licensed or authorised financial adviser before making an investment decision. Return of capital and the performance of your investment in the fund are not guaranteed. Past performance is not a reliable indicator of future performance. Interests in the Australian Ethical Managed Funds are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949), the Responsible Entity of the Australian Ethical Managed Funds. Interests in the Australian Ethical Retail Superannuation Fund (ABN 49 633 667 743, USI AET0100AU) are offered by Australian Ethical Investment Limited (ABN 47 003 188 930, AFSL 229949) and issued by the Trustee of the Fund, Australian Ethical Superannuation Pty Limited (ABN 43 079 259 733).
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