Episode 37 – Ethical & Sustainable Investing – Is There Money To Be Made?

Now days a lot of Australian’s are looking to invest in more ethical and sustainable ways and that is what we discuss on this week’s podcast. People are becoming more and more aware of thing such as climate change and different ethical issues that the world is facing and there investment choices are reflecting that. In the 2019 Responsible Investment Benchmark Report produced by the Responsible Investment Association of Australasia it says that in 2018 the responsible investment market grew by 13% to $980 billion which is 44% of the total professionally managed assets under management which sits at $2.24 trillion. 
 
 
The big question – Do I sacrifice returns for choosing to invest ethically?
 
 
The report mentioned earlier states that responsible investment funds continue to outperform mainstream funds over most time frames and asset classes, Australian figures comprehensively showed evidence that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet.
 
 
 
 
 
What are the ways fund managers choose sustainable and ethical investments?
 
 
 
ESG Integration – This is where there is a consideration of environmental, social and governance factors as part of an investment decision and is the most popular way to invest in a sustainable and ethical way. 
Negative screening – This is where you avoid investments in industries which have a negative impact on society and environment. Depending on your personal views this could include companies that derive profit from things such as mining, tobacco or gambling for example. If you are looking to invest in a negative screening fund then you need to make sure that what it screens for aligns with your personal values because the investment managers may not be aligned with your views. The report states that controversial weapons and tobacco are the most prevalent exclusionary screens among Australian institutional investors, while consumers on the RIAA website mainly look for funds that screen out fossil fuels and human rights violations. 
 
 
Norms-based screening – Screening out investments that don’t meet minimum standards and including investments that meet defined ESG criteria. 
Positive screening – This is where you actively look for companies who are contributing positively to society or the environment. This can be through things such as environmentally friendly products or socially responsible business practices. 
Sustainability themed investments – These are investments that target sustainable themes such as clean energy as an example. 
Impact investing – Investments that look to have a positive social and environmental impact and provide either a market or below market rate. 
 
 
How are ESG investments measured?
 
 
ESG metrics are measured in 3 different categories:
Environmental – The criteria for this includes energy use and impact on climate change, greenhouse gas emissions, waste, pollution, natural resource conservation and animal treatment.
Social – This considers a company’s relationship with it’s stakeholders including working conditions, impact on local communities, health and safety and employee relations and diversity.
Governance – This it the proper use of accurate and transparent accounting methods, fair voting, avoiding conflicts of interest and not engaging in illegal behaviour. 
 
 
How do I get started investing in an ethical or sustainable option?
 
 
There are a few options you can look at in order to take an ethical investment position within your broader investment strategy. Firstly, you can take a direct position by buying into companies on a public stock exchange that are regarded as ethical companies. To do this requires some research for yourself, you’ll need to research on the company’s history of operations, best starting point would be their annual financial reports that are released at the end of every financial year. Another way to include ethical investments, and a much simpler alternative to buying and researching directly, is buying into ETFs (Exchange Traded Funds) or Managed Funds that are diversified into ethical and sustainable companies. They both offer an easy way to invest in ethically and sustainably claimed companies in a diversified and transparent investment environment. Another way to invest ethically is to find out if your current superfund you are in has ethical or sustainable investment options, to do this simply go on the website and read the PDS investment options to find out, alternatively you could email or call them. 
 
 
Do your research!
 
 
With anything it’s always important to do your research but what may be considered ethical and sustainable to someone might not be your idea of that so with these style of investments it’s important to check in depth what they are and if it is a manged fund you’re going for then what are the underlying investments in that fund to make sure they match up to your views. 

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