Global coverage and media attention on climate change had fallen 59% in early 2020 at the outset of the Covid pandemic, does this mean climate change was 59% less of a problem? Obviously not...
The risks associated with climate change have been de-emphasised by the focus on the current global pandemic, however, they will take much more than a vaccine or face masks to mitigate. Ethical investing is not a singular solution to climate change, but rather an approach by which we can align our values with the way we invest.
Ethical investing is a powerful way to vote with your dollar and send a message to the boards of companies, that you care about the way they treat their social responsibility especially toward the environment. Not only is it an impactful and meaningful way to invest, it is also much easier to start than you may realise.
By now, we have all become accustomed to a life without single use plastic bags and many of us carry our ‘keep cups’ with us as we frequent our local café. Ethical investing is part of a broader approach to ensuring a sustainable future for generations to come. Investing ethically means investing your funds in companies that practice socially and environmentally responsible business practices.
This means including companies in your portfolio that actively follow ethical principles, including but not limited to:
- Investing in renewable energy;
- Sourcing from sustainable land and agriculture projects;
- Or investing in projects such as green property.
It also entails screening out companies that participate in unsustainable or unethical business practices. This may mean excluding producers and retailers of tobacco and alcohol, miners of fossil fuels, companies that use animal testing, or even producers of armaments. It is these combinations of positive and negative filters that help us identify companies whose values align with our own.
This sounds ideal in theory, but how easy is to invest ethically?
Since the introduction of ethical funds, there has been huge growth in the number of ethical options available to investors. What was once considered a niche approach to investing is now worth over USD$ 30 trillion worldwide.
Where you once had to hand-select each investment that aligned with your own values, you can now invest in a variety of pooled investments such as managed funds or with advisers that specialise in ethical investing. We have also seen a major increase in superannuation funds offering ethical investment options to their members.
While it is fantastic that we now have such a variety to select from it may leave many of us stuck with the paradox of choice.
In Australia there are a growing number of superannuation funds offering ethical and socially responsible investment options in addition to non-superannuation investments.
Deciding which funds to go with is often a matter of how closely their filters capture the values that you want in your own investments. These funds make it simple and cost effective to gain exposure to a portfolio of companies that have been selected by the fund manager based on their ethical criteria. Furthermore, investing in ethical funds can relieve some of the worry of monitoring the activity of companies yourself to make sure they uphold the fund’s standards.
Ethical investing doesn’t have to come at the cost of your own returns.
Findings in the Responsible Investment Association Australasia’s 2019 Benchmark Report highlighted that responsible investment funds have kept pace with and at times out-performed mainstream funds over surveyed time periods.
While it is argued that ethical investing diminishes the number of companies available to invest in, it has been found that this does not have a significant impact on performance. On the other hand, it does have a significant impact by decreasing the moral risk associated with your investments which may be much more valuable.
Ultimately, the rise of ethical investing has been integral in increasing the transparency with which companies conduct their business and has empowered ethical investors across the globe. Companies recognise the importance of different social and environmental issues and how these issues may affect their ability to attract future funding and investment.
Furthermore, the way companies report has also been changing with many companies voluntarily releasing sustainability reporting alongside their mandatory financial reporting. These actions reflect that the impact of ethical investing is being heard by large companies, and as more people choose to vote with their dollar more companies may follow.
Ethical investing is a tool available to all investors, both directly and indirectly. This is made possible through direct stock selection, managed investments and vehicles such as our superannuation. It is a way that we can make a real, positive impact on the world with our wealth. Seeking advice and wondering how you can begin to align your own values with your long term wealth?
How can RSM help?
A trusted RSM financial adviser can help you navigate the world of ethical investing and find the options that are best suited to you, based on your personal ethical filter, tax and financial situation, and tolerance for risk and targeted investment return profile.
Please get in touch with your local RSM office today.