The past year or so has emphasised financial concerns for many people as the world economy continues to feel the effects of the COVID-19 pandemic. More and more people, particularly young people, are looking to safeguard their future, paying more attention to investment opportunities – but they’re also concerned about what their invested money supports. That’s why we’re exploring ethical investing and how to get started.
The concept and practice of ethical investing goes by a few different names, such as sustainable investment or responsible investment, and is an approach that means you align your investments with your personal values. These values are usually associated with Environmental, Social, and Governance (ESG) factors, which can cover a variety of things:
Environment – Pollution, the climate crisis, water scarcity
Social – Supporting local communities, upholding employee rights, health, and safety
Governance – Business ethics, prudent management, appropriate executive pay
In practice, investing according to ESG screening could mean specifically excluding companies or funds that support the fossil fuel industry, or excluding those with a poor track record for human rights. It could also mean deliberately searching for funds or organisations that make a positive impact, such as investing in a program or social enterprise that tackles a social issue important to you (like addressing the issues of homelessness or gendered violence).
Ethical investing is highly personalised because every choice depends on an individual’s own values. In fact, as the interest in ethical investing has grown, more responsible investment funds have cropped up, many of which actually outperform traditional funds. In fact, Australian Ethical’s CEO and managing director John McMurdo believes that businesses that depend on fossil fuels for their value will decline as time goes on and more people and governments commit to addressing climate change. So, with up to eighty percent of Australians being open to ethical investment, it’s important to be able to recognise which options genuinely align with your values.
Before you start researching investments, you need to decide what’s important to you. You can’t filter your options if you don’t know what values to prioritise, so figure out what you want to support – whether that’s refusing fossil fuels, supporting workers’ rights, or just looking for the most ethical overall.
Crucially, if you’re interested in investing in an apparently ethical fund or company, research their practices to compare their words against their actions. As with consumer product industries, the finance industry is no stranger to greenwashing, so it’s a good idea to do your due diligence in figuring out who’s actually ethical and who isn’t. Websites like Responsible Returns and Ethical Advisers’ Co-op can be extremely useful for determining what companies are saying and how they measure up.
Angela Stevens, co-founder of the female-led and finance-focused social enterprise VIDA Melbourne, also recommends that you take a look at how well your investment performs financially.
At vida, we believe there are two parts to investing ethically. Sure, investing in a company that aligns with your values is super important, but it’s equally paramount that you’re making a good financial investment. Ask yourself: what are the average returns like? What about the average returns over the last five years? Immediate past performance isn’t always the best indicator of future performance, so that’s why we recommend making that five-year comparison – it helps us to see the bigger picture!
Alternatively, if you’re new to investing, you could consider buying an ETF (exchange traded fund) that’s specifically marked as ethical. ‘An ETF is a bundle of shares with diversified risk, so it eliminates a lot of the grunt work behind researching what specific shares to buy,’ Angela explains. ‘When we diversify, it balances the overall risk of our portfolio. Different companies and industries perform well at different times. If one business or sector in your ETF doesn’t perform so well, you won’t lose all your money because you might receive gains from another company in your ETF.’
You can check out a list of the top 3 high-performing ETFs in Australia here!
Ultimately, the best thing to do is to seek advice if you’re unsure. Ethical investing is about supporting your values, certainly, but it’s also about protecting and growing your finances, so finding an adviser that can do both is as important as finding the right investment option for you.
If you liked this article, check out our feature on cryptocurrencies.
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