How Do I Invest Ethically (ESG Investing)?
Aligning your investments with your values is something that is becoming more and more important to our clients. I am often asked how we can ensure that our money, especially our superannuation, is not being used unethically - that is to fund things like fossil fuels, modern-slavery, tobacco and corruption.
Ethical investing involves using your ethical principles to filter and guide your investment decisions. The practice has been around for some time but, in line with consumer trends, it has started to gain more traction in recent years. Four in five Australians feel environmental issues are important when it comes to the investment of their money, according to a study commissioned by the Responsible Investment Association Australasia (RIAA).
Investing in companies that are ethically, socially and environmentally friendly is not only good for people and the planet, but it is proving to be good for business too.
To get you started, we have answered some common questions related to ESG investing below.
What is ESG Investing?
ESG (environmental, social and governance)-based investing aims to maximise returns by focusing on investments that stack up well when assessed based on these criteria.
ESG investing prioritizes financial returns alongside a company’s impact on the environment, its stakeholders, and the planet.
This image below details some of the elements that are under consideration when looking at what constitutes ESG:
What are the different ways to invest in ESG?
There are three primary ways that you can invest in ESG. These include:
Super Funds
Many super funds offer ethical or sustainable options to their members. RIAA assessed Responsible Investment (RI) super funds based on five criteria and came up with a list of 13 Australian super funds (and one New Zealand super fund) which it identified “as leaders for articulating and demonstrating a comprehensive approach to responsible investment”. These include:
Australian Ethical
AustralianSuper
CareSuper
Cbus
Christian Super
First State Super
Future Fund
Future Super
HESTA
Local Government Super
NZ Super
Unisuper
VicSuper
Vision Super
Exchange Traded Funds (ETFs)
There are a growing number of Australian and international ESG ETFs. Canstar has ranked the top performing ETFs on the ASX here
Managed Funds
There are a number of managed funds that give investors exposure to ethical investment options. Some of the fund managers with a range of ethical products include AMP, Australian Ethical, Mercer, Pendal, Pengana, U Ethical and Vanguard.
Shares
You can research and find companies yourself. As with all share investing, you will need to do the research on the company to decide whether you want to invest.
How do ESG investments perform?
There’s growing research that, in addition to lower downside risk, ESG stocks generate comparable or superior financial results compared with their non-ESG-focused peers.
According to asset management start-up Arabesque, S&P 500 (SNPINDEX:^GSPC) companies in the top quintile for ESG outperformed those in the bottom quintile by more than 25% between 2014 and 2018.
In addition, the RIAA’s Responsible Investment Super Study 2019 found that Australian super funds that comprehensively engage in responsible investment outperformed their peers over one-, three- and five-year time frames.
As with all investments, performance varies so you should always research and compare performance as you would any other investment class.
How do I find ESG investments?
The RIAA has created its Responsible Returns tool to help investors looking for ethical investment options based on the issues that matter to them most.
You select two themes you’d like to support, two issues you want to avoid, the type of product you are looking for and the website will reveal a list of providers that have products that meet your criteria.
How do I evaluate a company’s ESG performance?
Unfortunately, there are no agreed upon standards for evaluating ESG performance - at least not yet. Two ways that you could look at a company or fund’s performance include:
Corporate Performance
Companies committed to ESG initiatives should be publishing measurable goals, plus the progress against those goals, in periodic sustainability reports.
Some sustainability reports are better than others, however. Look for reporting that follows ESG standards established by the Global Reporting Initiative (GRI) and/or the United Nations Principles for Responsible Investment (PRI).
Third Party Sources
You can also use third-party sources to validate sustainability reports, such as:
There’s no shortage of choices when it comes to ethical investing, and it’s a personal decision as to what’s right for you. Make sure to consider your values, your financial goals and the level of risk you’re comfortable with, before making any investments.
If you would like to discuss your investment plan with one of our advisers, please drop us a line. We can help you make a financial plan and ensure that your investments not only align firmly with your values, but also meet your long term financial goals.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate considering your particular objectives, financial situation and needs.
Your Advisors are Hell Yes! Financial Advice Pty Ltd, ABN 25 618 086 605 | CAR 1254388
A Corporate Authorised Representative of Viridian Advisory Pty Ltd, ABN 34 605 438 042, Australian Financial Services Licence 476223
Vicki O’Connor AR 1000956, an Authorised Representative of Viridian Advisory.