The Value-Driven Power of Ethical Investing
Every day, you and I make buying and spending decisions based upon our values and principles.
We ask basic questions before committing to a purchase – we might choose to pay extra for organic, fair-trade, locally made, sustainable and environmentally friendly products. We make decisions based on our view of the world – we might decide to avoid certain retailers or refuse to buy products that we know involve harm to animals, the use of chemicals or employ unfair practices in the workplace.
We might even decide to shop second-hand or look at ways to reduce our carbon footprint. We may choose solar electricity for our homes or opt to ride our bike instead of taking the car.
All of these decisions reflect our individual ethics and beliefs, which are personal and can mean different things to each of us. So when it comes to making an investment, you and I will again use our values and preferences to screen our investments based on the things we care passionately about.
What if we could make that investment knowing we were doing good in the process? Knowing that we were putting our money to work for the better, not the worse? Now wouldn’t that be financially rewarding over the longer-term.
Investing with a purpose
When investing, most people seek to generate a reasonable and often quick return on investment. Whilst generating a return on your investment is integral, it shouldn’t be at the expense of your ethics.
Much as with the decisions you make when it comes to buying and spending, the same power of conscious consumerism extends to investing.
For example, have you considered the social and environmental consequences of where you invest? If you wouldn’t shop or buy from certain companies or industries, why would you choose to make an investment in those same companies?
As one lone investor, you may not be able to change the world, but by investing in the funds that make a difference, you, the investor, put yourself in a strong position by acting collectively with other fund holders to make a positive impact and support ethical businesses that display social, sustainable and environmental practices.
Using superannuation as a vehicle for change
As of March 2015, Australians have more than $2.05 trillion invested in superannuation. For many Australians, superannuation is their second biggest asset in their lifetime after the family home and for those employed, 9.5 percent of an annual salary is typically invested in superannuation on their behalf every year.
It’s a major asset and a significant personal investment.
Unfortunately, most people don’t make a conscious choice on how to invest their superannuation, instead electing to invest in default investment options offered to them because it’s the easiest thing to do. Often this means that the money is invested in companies and industries that contribute to greenhouse gas pollution or uranium mining.
You might not know this but, in 2005, superannuation choice legislation was introduced. This now means that you can choose which super fund your employer pays into on your behalf.
While investing is about building for your own future and your families, superannuation can be used as a vehicle for building that sustainable future. Through your super, you can choose to generate a financial return through the support of environmentally and socially responsible companies and practices.
If you had the ability to switch superannuation funds to avoid investing in coal or seam gas, would you? Interestingly, one quarter of all Australians would.
Unpacking the ethical investment jargon
The term ethical investing is broad. Also known as ‘green investing’ or ‘socially conscious investing’, it’s about actively exercising choice around the types of companies you do or do not want to invest in based on those values and beliefs we talked about earlier.
It looks at financial and non-financial factors.
When choosing ethical investments, it can often be easier to understand where your money is invested.
Sustainable investments generally focus on protecting the environment and typically use a screening process to avoid investment in practices that are regarded as ‘non-sustainable’, such as tobacco or arms dealing industries.
Socially responsible investing primarily focuses on investing in businesses that follow good social principles and a decent commitment to social responsibility.
Impact first investing aims to address social challenges and to create positive change through social change, corporate behaviour, and government and economic policy.
Do your own research and make your call
Most ethical investment options and fund managers have Environmental, Social and Governance (ESG) risk management criteria that they base their investment process and decisions on.
It therefore pays to do your research when it comes to selecting a super fund or investment to ensure a match between the fund and your own values and ethics. For example, just because an investment is ‘sustainable’ doesn’t mean they categorically won’t invest in fossil fuels.
It’s also a difficult area for investors and fund managers alike to define. What one person might call ‘sustainable’ is not the case for someone else. Sustainable investments may include energy efficiency and clean energy, innovative health care, education services, pollution and environmental control, and healthy eating.
These industries will arguably be in higher demand in the future so there is the potential for higher future growth.
Historically, to invest ethically has been an expensive option due to the difficulty for fund managers to screen and assess ‘sustainable’ practices. This is no longer the case. As more and more super funds and fund managers offer ethical investment options, the cost to invest is reducing and the range of choice is increasing. There is no longer a compromise to be made between strong investment returns and sustainable practices.
The bottom line is that a healthy rate of return on investments (including your super) and a clear conscience are not mutually exclusive.
You can have one and the other.
You simply need to take your own ethical criteria into account when making an investment decision, figure out exactly where your money is going, and then make an informed choice that links your money to your values.