ethical investing

Ethical Investing

We are used to thinking about the value of investment as measured by financial return. However, investing with an eye to environmental or social issues and ethical considerations has become more prominent.

Ethical investing has emerged as a response to investors’ will to combine ethical with financial considerations in investment decisions. It gives the individual the power to allocate capital toward companies whose practices and values align with their personal beliefs.

Ethics differ from person to person – what one person may consider unethical (eg. gambling) another may be comfortable with, while both people may be against child labour.

Where ethical investing may have once been assumed to lead to lower returns, several studies have shown that sustainable investing and increased investment returns are positively correlated. The Responsible Investment Association Australasia (RIAA) have done a benchmarking report every year for the past 20 years, comparing ethical investing to mainstream options such as the ASX 200 or a balanced portfolio. Responsible investments have always outperformed, over almost every single time period.

What are ethical investments?

Ethical investments tend to mirror the political climate and social trends of the time. In the 1960s and 70s, ethical investors focused on those companies and organisations that promoted equality and rights for workers and shunned those that profited from War.

Since the 1990s, ethical investments have focused on environmental issues such as climate change. Ethical investors moved away from coal and fossil fuel companies, instead favouring those that supported clean and sustainable energy.

The latest RIAA Benchmark Report shows ethical funds assets have grown 62 per cent in 2015 to $52 billion. The sector has doubled in two years as responsible investing redefines the investment landscape.

Growth in ethical investing is being driven by a new generation of investors who are aligning their investment values with personal values. There’s a rising consciousness in the way people consume goods and a growing sense of empowerment as more people express themselves through investing.

How do you invest ethically?

The first step towards ethical investing is figuring out precisely which causes and industries you are passionate about. Choose companies that are good corporate citizens – they make decisions that align with the interests of shareholders by thinking long-term instead of focusing just on next year’s profits. They treat staff fairly, providing services to customers in an honest, ethical manner.

There are two main methods to identify positive ethical investments:

Negative Screening: Avoiding investment in industries which have a negative impact on society and the environment. I will typically use this method while keeping an eye out for the below knowing they could be in a growth area.

Positive Screening: A proactive search for investments that contribute positively to both society and the environment.

Tobacco, weapons, pornography, fossil fuels, child labour  and high-polluting sectors are obvious areas for ethical funds to avoid. However, market pressure on gambling, alcohol, junk food, and sugar stocks could rise if shareholders believe they cannot influence how these sectors respond to social problems, such as addiction and obesity.

Generally avoid companies that:

  • Do not comply with the appropriate regulations;
  • Have activity dependent upon the destruction or wastage of non-renewable resources, for which viable feasible alternatives exist;
  • Involve substantial change to the environment, which is not made good at the conclusion of the activity;
  • Contribute to the serious inhibition of human rights;
  • Fraudulently market or deceitfully advertise products or activities.

If you are in need of any advice on ethical investing, please contact us on 07 3398 4888.

Posted in Investing.