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Cracking the facts

What’s ethical investing?

  • October 28 2020
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Cracking the facts

What’s ethical investing?

By Dominique Nava
October 28 2020

How would you feel if you found out that the fund you have money in is invested in companies that have morally questionable products or beliefs? How does one invest “ethically”?  

What is ethical investing?

What’s ethical investing?

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  • October 28 2020
  • Share

How would you feel if you found out that the fund you have money in is invested in companies that have morally questionable products or beliefs? How does one invest “ethically”?  

What is ethical investing?

Increased interest in ethical investments in recent years show that more investors are aware of the range of issues affecting the world, and they want to hold companies accountable for their negative impacts. Recent data from the Responsible Investment Association Australasia (RIAA) shows that 92 per cent of Aussies now expect their superannuation or other investments to be invested responsibly and ethically, and that four in five participants in the study said they would consider switching providers if their current super or investment fund engaged in activities inconsistent with their values.

In this video, we talk about what ethical investing is and how you can invest your money in a way that reflects your personal values. 

Ethical investing is a type of investing process that takes into account the investor’s personal values (be it social, moral, religious, political, or environmental values) prior to making the investment decisions. 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. This means that the expected returns on these investments are not just monetary in nature, but have an  overall impact on the investor as well as the planet.

There are two ways in which ethical investing could be done. The first is through positive screening. With this method, an investor chooses to invest in industries/sectors/companies whose values align with that of their own values. For example, after learning that a company is focused on lowering their carbon footprint (the amount of greenhouse gases released into the atmosphere), an investor may choose to put money in the firm because it aligns with their environmental advocacy. 

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Meanwhile, negative screening is when investors avoid industries whose values directly differ from their values. Some ethical investors avoid sin stocks, which are companies that are involved with stigmatised activities, such as gambling, alcohol, smoking, or firearms.

 Ethical investing ensures that investments are made in line with the investor’s values.  As more people choose to invest ethically, it positively impacts both society and the environment in such a way that it discourages other industries. However, there is a common misconception that ethical investing might not fetch the same return as other industries. It is also  generally believed that returns on ethical companies/industries tend to be lower than their counterparts, and the time taken to generate any return would also be longer.

Intelligent Investor senior portfolio manager Nathan Bell said that this false impression couldn’t be further from the truth. “Taking account of environmental, social and governance considerations in an investment process is not only important, it can improve investment outcomes,” he flagged. He also cited “irrefutable evidence” of a clear link between ESG investing and more informed investment decisions, plus better risk-adjusted returns in the long run.

Like with any other investment decision, investors are advised to do their due diligence before practising ethical investing.In addition to analysing investments using ethical standards, the historical, current, and projected performance of the investment should also be taken into account. To examine whether the investment is sound and has the potential to reap significant returns, the review of a company's history and finances is necessary. It is also important to confirm the firm’s commitment to their declared ethical practices and measures. 

Want to take a deeper look into ethical investing? Explore nestegg today to gain more expert investment insights to amplify your investment strategies.

What’s ethical investing?
What is ethical investing?
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