Some investors already practice actively choosing which companies to support with their investments. But there are still many investors who choose the default option in their industry fund, unaware if the underlying businesses have ethical practices.
The good news is that it is not too late to make the switch to ethical investments and support entities that take environmental, social and ethical issues into consideration.
Ethical investment objectives
The main objective of ethical investments is to create a positive impact by investing in companies that take environmental, social, governance (ESG) and ethical issues into consideration and make an effort to address or prevent the business from contributing to the issues.
Ethical investment is simply an umbrella term for different types of investments with similar objectives as above, but the definition and objectives would have slight changes depending on the investor or fund manager’s approach.
There are several approaches that fund management companies and investors take when choosing ethical investments, such as:
- Sustainable investments
- Impact investments
- Best in class
- Corporate engagement
Sustainable investments select companies and institutions based on sustainability factors or how well they manage ESG factors.
Impact investments fund companies that promote good practices and provide relevant solutions to the environmental, social or any issue the investor and institution(s) are working on.
Impact investments are simple ethical investments because both measurable solutions and financial returns are expected from the funded institution(s).
Some sectors are a little more difficult to screen, so fund managers and investors should focus on finding the companies or assets with the best track record according to their ethical standards. Best in class investments may not tick all the boxes but they at least have the highest ESG standards within their sector and across all sectors.
Some investors choose to invest in companies that are open to communicating and collaborating with asset managers and owners through corporate engagement. The open communication is used as a means to advocate positive changes in the company’s practices or increase positive outcomes.
Screening is also executed when selecting assets. Selection may be done through exclusion or classified according to certain norms.
The selection may be:
Negative or exclusionary screening excludes companies, institution or assets if they are involved in activities deemed unethical or against the fund’s value, though these are usually subjective. Some companies or sectors that are usually excluded belong to tobacco, weapons, pornography, animal testing, gambling and other similar sectors.
Positive screening selects companies based on superior ESG performance. Also refers to best in class investments.
Norms-based screening selects assets based on international ESG standards developed by international organisations like the United Nations.
Advantages and disadvantages
The main advantage of ethical investments is that the investor is assured that selected assets in their funds are institutions that share similar beliefs and values. This is even more true with impact investments since the funded entity must be able to provide measurable results along with financial returns.
Since the ethical investment sector has recently grown in Australia and New Zealand, investors now have more choices in managed fund and individual asset forms.
However, the range of product offerings for ethical investments is still few despite the growth they achieved. This means individual investment options would still be limited for a while longer.
It has also been mentioned that the definition of ‘ethical’ tends to be subjective. Those who would opt for fund managed ethical investments should understand the underlying investments first before making a commitment.
Ethical investment companies
For those who are already looking for assets that qualify as ethical investments, look for individual companies or funds which are certified by the Responsible Investment Association of Australasia (RIAA).
The RIAA was responsible for the standardisation of criteria that funds and other assets must qualify for in order to be considered as an ethical investment and only those which carry the RIAA symbol are verified.
RIAA certifies both the product (asset or fund) and the financial adviser who presented, and will offer, the product to the investing public.
Examples of ethical investments
The RIAA has a list of certified ethical investment products available in Australia and New Zealand in its website.
The list includes the top performing managed funds from the following issuers:
- Generation Wholesale Global Share
- Australian Ethical
- Bank Australia
- Christian Super
- Stewart Investors
The fund issuers are required to disclose the underlying investments in the fund and they may also remove or replace individual assets that fail to meet their ethical standards at any point in the fund’s life.
Those who wish to get started on managed ethical investment funds should refer to the list of certified products listed by RIAA. However, those who wish to make individual investments may either refer to the list of RIAA certified financial advisers or check each fund’s product disclosure for the list of individual assets and how they were selected.
This information has been sourced from ASIC’s Moneysmart, Australian Ethical and Investopedia.