Ethical Investments – What does it mean?

Socially responsible investing (SRI), or social investment, also known as sustainablesocially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about a positive change. The term describes an investment process that incorporates environmental and social factors when selecting investments, in addition to the objective of achieving a competitive financial return. Investing ethically means that you know what your money is doing and what it is funding.

In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some avoid businesses involved in alcohol, tobacco, fast food, gambling, pornography, weapons, contraception/abortifacients/abortion, fossil fuel production or the military.

The easiest approach is to view Ethical Investing as a spectrum from “deep green” to “light green” products that let people invest according to their level of conviction.

The deep-green end includes ethical funds that avoid sectors considered harmful — for example, tobacco, controversial weapons (landmines), pornography and companies that earn a significant amount of revenue from fossil-fuel industries. Ethical funds usually have relatively higher fees because of an extra screen to weed out negative companies/sectors and include positive ones.

In the middle of the deep-light green spectrum are funds that “tilt” away from sectors considered harmful: for example, tobacco and weapons. These products do not go as far as ethical funds (in terms of sector avoidance) but typically cost less.

The other end of the spectrum includes a growing number of funds that integrate ESG considerations into their investment strategy. Their broad responsible investment approaches often focus on corporate engagement, active ownership and stewardship.

How to invest ethically

The simplest method is to buy shares in a listed company that you deem ethical.

To narrow down which stock to choose, you can follow the industry standard by “negative screening” for suitable candidates (avoiding companies that have a negative social or environmental impact) or “positive screening” (buying companies you believe have a positive social or environmental impact).

For instance, if you have an aversion to uranium mining, coal-seam gas, logging and gambling, you could negatively screen all companies engaged in these activities. Alternatively, you could handpick stocks you feel have a positive effect on the environment, or the community at large, therefore positively screening to deliberately hunt down certain renewable energy or recycling companies, for example.

One of the oldest and so-called greenest ethical managers is the ASX-listed fund, Australian Ethical Investment, which targets stocks it believes are positive for the environment and society. It shuns heavy industry, mining and other old-world industries such as coal and oil, in favour of healthcare, technology and renewable energy producers, which it calls more “forward-looking” industries.

The fund invests in companies such as Computershare, MYOB, Adobe Systems and telecommunications stocks such as Telstra.

But even finding stocks in healthcare, telecommunications and information technology is tricky because these sectors are not immune from externalities either. The fossil fuels and chemicals required to, firstly, manufacture electronic gadgets such as computers, and then run them, creates a monster footprint.

SRI growth

Growth in the broader SRI market in Australia and New Zealand is accelerating, growing 247% from 2014 to 2016 to reach $516 billion.  This growth is part of a global trend that increasingly sees investors direct funds towards environmental and social mandates and is buoyed by the weight of our growing superannuation pool which is set to reach $9.5 trillion by 2035.

Top 5 ethical investment choices

1. BetaShares Global Sustainability Leaders ETF

This newcomer provides exposure to 100 large global stocks that are climate-change leaders and rate well on responsible investment considerations.  It’s weighted towards US equities and about a third of stocks in its index are information technology companies.

2. UBS IQ MSCI World (ex Australia) Ethical ETF

One of five UBS ETFs that provide ethical screening for global equities; others cover Asia, Europe, Japan and the United States. The ETF excludes tobacco and controversial weapons stocks, thus suiting investors who want to invest responsibly in overseas equities, without the same comprehensive sector screening found in “deep green” ethical funds.

3. Russell Investments Australian Responsible Investment ETF

The ETF provides exposure to a responsible investment portfolio that is enhanced for environmental, social and governance (ESG) considerations. The ETF excludes companies involved in tobacco, alcohol, gambling, pornography and armaments, as well as producers of carbon-intensive fossil fuels.

4. Morphic Ethical Equities LIC

The recently listed LIC avoids companies involved in fossil fuels, tobacco, alcohol, gaming, intensive farming and aquaculture, and deforestation. The portfolio focuses on companies involved in sustainability, clean water and air, recycling and future technology.

5. Hunter Hall Global Value LIC

Conservative investors might wait until there is greater clarity on Hunter Hall’s direction and market sentiment improves. Others will look closer, given the influence of some well-performing investors on its share register and the LIC’s potential to boost its dividend.

To help you understand ways you can invest with an ethical focus, Gemma Dale interviews Simon O’Connor, CEO of the Responsible Investment Association of Australasia, demystifying the jargon and covering such issues as:

  • Whether investing with an ethical lens reduces your portfolio return,How to align your portfolio with your own personal values,
  • Simple ways to introduce ethical, social and governance (ESG) factors to your investing decisions,
  • Real examples of ESG done well – and poorly, and
  • Hard-headed reasons to pay attention to sustainability issues, even if you’re not passionate about the cause

NAB Ethical Investing Video –

If you are interested in some more information regarding Ethical Investing and how you can makes changes to your account please contact our office to arrange a meeting with Bruce on 02 9369 1604