What is 'ethical investing'? 

Growing interest in the impact of fossil fuels on the global climate is sparking questions about whether investors can integrate their values around sustainability with their financial goals and, if so, how? And sustainability preferences are not just restricted to greenhouse gas emissions - many investors also have concerns about land use and biodiversity, toxic spills and releases, operational waste, and water management, among other issues.

So just as you express your political preferences around sustainability through the ballot box, you can also make a difference through their personal participation in global capital markets.

Of course, one key question investors face is how to do this without compromising their desired investment outcomes. In other words, how can you reduce your portfolio’s environmental footprint while maintaining sound investment principles and achieving your investment objectives?

The answer, for you, may be found in 'ethical' funds. For many years, personal investors have been able to 'pivot' their individual investment strategy towards those companies that observe clearly defined behavioural guidelines in the ethical, socially responsible, and sustainable investing space.

These investment categories can be described as follows...

Ethical investing:

Companies and sectors are negatively screened and not included in portfolios if they make or sell certain products. Positive screening can also be part of the process.

Socially responsible investing:

Companies are generally screened out if they take part in excluded activities, but may be included if their commitment to social responsibility outweighs the negative aspects.

Sustainable investing:

Investments are chosen on the basis of how well a company manages environmental, social and corporate governance factors, not on what the company makes or sells.

What is the screening process?

Ethical investment funds screen out areas of investment they consider unethical (negative screening) and screen in areas they consider ethical (positive screening). The breakdowns vary from fund to fund, but Australian Ethical's mix gives a good sense of what ethical investment through super funds and other investment vehicles looks like…

Unethical investments:

Coal, fossil fuels, oil, weapons, tobacco, logging, gambling, companies implicated in human rights abuses.                                                                                                                                                          

Ethical investments:

Clean energy, sustainable products, medical solutions, innovative technologies, responsible banking, healthcare, recycling, energy efficiency, education, aged care.

So who decides what's 'ethical'?

If you're considering ethical investment, look for a fund that's a member of the Responsible Investment Association Australasia (RIAA). The peak body created a certification program in partnership with the NSW Department of Environment and Conservation and the Victorian Government in 2005, with a view to making uniform standards of disclosure for funds. In order to qualify, fund managers must make a convincing case to the RIAA that they have a specific methodology in place to weed out unethical behavior - the process is then independently verified by an accounting firm. 

Growing popularity...

Socially responsible investment assets in Australian funds grew by close to 250 per cent over the two years to 2016 – one of the fastest growth rates in the world, according to new research.

The Australian Centre for Financial Studies has released a report on socially responsible investing in Australia, drawing on data from a number of sources, including the Global Sustainable Investment Alliance, the United Nations, the Asset Owners Disclosure Project and the Responsible Investment Association of Australia. Here are some interesting observations...

  • In 2016, Australian funds managed US$516 billion of socially responsible investment assets – a 247 per cent increase from US$148 billion of assets in 2014.
  • Among the markets surveyed, only Japan had a higher growth rate over that period. Growth of SRI assets in Europe was 12 per cent and in the United States 33 per cent.
  • The total market globally is estimated to be worth US$22.9 trillion, accounting for 26.3 per cent of all professionally managed assets.
  • The major driver of SRI investing currently is concern about climate change.
  • Australia ranks third in the Asset Owners Disclosure Project’s Global Climate 500 Index, which rates large asset owners worldwide on their management of climate risks within their portfolios.
  • In Australia, there are 69 investment managers offering a total of 128 SRI products. The Responsible Investment Association of Australia has certified 51 responsible investment products to date. Regulatory changes have played a part in this growth. The Financial Services Reform Act, which took effect in 2002, introduced a requirement for issuers of investment products to disclose the extent to which labour standards or environmental, social or ethical considerations are taken into account.
  • Since 2014, Australian Securities Exchange Corporate Governance Principles have stated that listed entities should disclose, on an “if not why not” basis, whether they have a material exposure to economic, environmental and sustainability risks and, if so, what they are doing about them.