How to invest in a socially responsible way
Most of us genuinely want to do good in the world. This includes investing in a socially responsible way that is aligned with our values. Here we explain what socially responsible or ethical investing is and how to take control of your investments.
The growth in socially responsible investing
Many people are trying to live more conscious lives. For instance, we are placing greater consideration on where our food is sourced. If we eat meat, we are wanting to how the animals are raised. We’re seeing a similar trend with investing. More investors are choosing to align their personal values with their investment goals.
According to the Responsible Investment Association Australasia, the proportion of people who would rather invest in a fund that considers environmental, social and governance (ESG) issues, as opposed to a fund that focuses solely on maximising returns, has risen by 27% since 2013. That’s a strong trend which sends a clear message that people care about more than just profits.
This is further evidenced by seeing more fund managers creating products with a socially responsible focus.
What makes an investment ethical?
Ethical investment funds commonly use negative screen tests to exclude companies engaged in what they consider to be unethical activities. They may use positive screen tests to select socially responsible companies. Or they may use a combination of both methods.
Of course, ‘ethical’ is a subjective term. For example, an ethical fund manager could define tobacco and gambling as unethical. But that same fund manager may consider alcohol to be acceptable to include in their fund. Typically though, ethical funds tend to avoid investing in companies involved in weapons manufacture, alcohol, tobacco, gambling or fossil fuels; while favouring renewable energy companies, sustainable technologies or healthcare.
Even still, it can be difficult to decide if a company is ‘ethical’. For example, many people avoid investing in companies that mine uranium. But those same companies may also extract materials to build wind turbine towers. Or a bank that finances coal mines may also lend to solar farms and energy efficiency projects.
How do I select socially responsible investments?
When selecting socially responsible investments, the most important factor is what you consider ‘ethical’. Given the range of ethical considerations, you may need to do in-depth research to find funds that match your values. In addition to understanding the financial aspects of the investment, you need to ensure that the underlying businesses and their activities meet your standards.
While there is no exact formula for ethical investments, there are some general values which many people share. As a baseline, most socially responsible investors will look for companies that avoid the following:
- Causing illness, disease, or death
- Destroying or damaging the environment
- Treating people with disrespect.
In Australia, it’s becoming easier to find and investment fund that suits you. Many well-recognised investment names are on the list of ethical fund providers. Financial advisers are also becoming attuned to the needs of the ethical investor. Talk to a financial planner that really listens to the issues that are important to you. They can help you develop a socially responsible investment strategy that is aligned with both your values and your investment strategy.
How do I check if my super is ethically invested?
While you may have an ‘out of sight, out of mind’ attitude to your super, remember it’s your money. You have full control over where and how it’s invested.
To check if your super is ethically invested, start with your super fund’s website. Search for your investment option(s) and look for the Product Disclosure Statement (PDS) or fact sheet. If you cannot locate it, call your super fund directly.
In most cases, you should see a list of the top 10 Australian and international shares that you’re invested in. You may not get a full list of shares, as some fund managers keep this part of their intellectual property. Unless it specifies that your fund is an ethical investment fund, it’s unlikely to meet the general criteria.
If your super fund doesn’t have an investment option that matches your idea of ‘ethical’, there are other options to consider. You could start a direct share option and construct your own portfolio of companies compatible with your values. Alternatively, consider the increasing number of investment managers that apply ethical filters across their funds.
What are the risks of socially responsible investing?
Socially responsible funds experience the same market ups and downs as any share-based investment. Although many ethical funds achieve good results, there are risks to be aware of. Check out our article on the pros and cons of socially responsible investing to explore these further.
When investing in socially responsible funds, the focus should always be on your long-term investment strategy. It’s worth speaking to a financial adviser who really listens about issues that are important to you. That way, you can develop an investment strategy where your heart is and reduce risk at the time.