With ongoing media discussion about climate change and global warming, you might think that Ethical Investing is new to the world of investments.
What is ethical investing?
It's an investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical investment might include, for instance, a decision to avoid investing in certain sectors such as alcohol and tobacco, or to positively favour investments in others such as companies which manufacture environmentally-friendly products.
It is an evolution, not just a passing trend
The idea of combining social with financial judgements in the investment process is not a recent phenomenon. In biblical times, Jewish laws laid down directives on how to invest according to ethical values and Quakers practiced socially responsible investing as early as the 16th century, based on their beliefs in human equality and non-violence. In the 19th and early 20th centuries, Victorian social concerns such as temperance and just employment conditions resulted in church groups like the Methodists avoiding investments involving tobacco, alcohol and gambling.
The current ‘mass’ movement began during the Vietnam War, when increasing numbers of US investors didn’t want their money going toward supporting that war, and the turning point for socially responsible investors came during the campaign to eliminate the racial discrimination of apartheid in South Africa, with the movement during the 1980s to divest from companies doing business there.
Investors are increasingly going green
Today, ethical investing has developed well beyond when it mostly meant not buying shares in controversial industries such as tobacco, firearms, alcohol or gambling.
Now, investors who favour this approach routinely consider a broad range of corporate behaviour under the umbrella of so-called ESG factors - environmental, social and governance, as in corporate governance.
On the surface, it would seem that ethical investing strategies by big corporations still have some way to go. But investors committed to responsible investing practices, and to excluding investments in funds and companies that don’t tick all the boxes in terms of sustainability, protecting the environment, and the rights of people and animals, shouldn’t be too disillusioned.
In reality, despite a few isolated incidents and inconvenient truths, the options and safeguards around ethical investing are now better than ever. As well as a wide range of specialist ethical funds providing full transparency to investors in terms of their investment methodology and company holdings, more and more Australian managed funds are offering ethical choices.
But as with most things, more choice means ethical investing can be a minefield... the primary considerations being:
- Defining your ethical boundaries…
There are no regulated definitions around ethical investing, and an industry that may be considered unethical to some may be perfectly acceptable to others. For example, is a rail company unethical if it has a contract to transport iron ore? A sensible approach is to rule out specific industries and then consider other holdings on a case-by-case basis.
- Weighting up the positives and negatives…
Positive and negative screens are key in the ethical investing process.
Positive screening involves looking for companies that are actively involved in areas or activities aimed at protecting the environment, for example, or who are focused on medical breakthroughs.
Negative screens are used to filter out companies involved in harmful areas, such as miners, oil production, tobacco or old growth forest logging.
- Sourcing transparency…
With the number of funds tagged ‘ethical’ growing, it’s important to consider that they are not all created equally or may not match your objectives. Transparency is key.
If you are interested in learning more about Ethical Investing, please don’t hesitate to contact your adviser or discuss this alternative when you next meet.
The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.