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What is ethical investing and how do you do it?

Ethical investing is one of the biggest trends in financial planning. But what does it really mean and how ethical can your portfolio really be? Read more here.

Ethical investing has quickly become one of the biggest trends in financial planning. Granting investors the power to selectively choose where they invest, it’s a modern answer to the world of auto-portfolios and impersonal selections. While it might be more time-consuming to do, it’s a powerful way to take a stand, assist the future, and truly walk the talk.

Thankfully, making an ethical investment is far less complicated than it sounds. By working with an established professional, investors can weed through their current investment portfolio and select new funds that meet their ethical boundaries.

So let’s take a closer look at what ethical investing means, and discover how you can invest without sacrificing performance or your peace of mind.

What is ethical investing?

Ethical investment is a selection strategy that involves arranging portfolios based on personal, value-centric, or moral beliefs. Using this strategy, investors fill their portfolios with companies and funds that align with their personal ethics. Investments that don’t meet these criteria, no matter how lucrative, are struck from the portfolio.

For example, an investor may refuse to back a company that does not support green or sustainable solutions. Another investor may choose to avoid funds that are not socially responsible in nature. Others may avoid certain selections due to personal convictions or religious beliefs — for example, the promotion of tobacco, nuclear power or companies that utilise sweatshops.

It is important to note that the term ‘ethics’ is widely variable. Something ethical to one investor may not be ethical to another, so personal selections are a significant part of the ethical investment process.

Why you should consider ethical investments

One of the biggest reasons you might consider transitioning to ethical investments is for personal peace of mind. By allocating your funds toward interests that support your moral values, you can rest easy knowing that your capital is in good hands. You are leaving a legacy of value that brightens the horizons of sustainability, society and the environment.

Ethical investments can also be extremely profitable. According to the most recent data from Morningstar, sustainable equity funds have continued to outperform traditional investments. 75% of sustainable funds beat their category average in 2020, and attracted record inflows from Q1-Q3 in 2021. Although no returns are ever guaranteed, ethical investments are generally presented as a highly sustainable choice.

No matter where your values lie, ethical investing adds an additional personal stake in your money and your performance. Choosing to align with companies that share your beliefs is an excellent way to pair sustainability with forward-thinking success.

How to decide whether an opportunity is an ethical investment

As mentioned previously, ethical investments mean different things to different people. Selecting an option that is both lucrative and ethical may take time, which is why knowing the right questions to ask will significantly speed up the process.

There are a few major questions to consider when determining if an investment is ethical:

  • Has the company been vocal about their beliefs, ethics and corporate social responsibility priorities?
  • What do employees have to say about the company? Is there a conflict between their stated goals versus the day-to-day employee experience?
  • Stay up to date with the news. Keep an eye out for ethical breaches, scandals or misconduct associated with your specific companies.
  • What is the company’s environmental, social and corporate governance (ESG) score? Organisations such as Refinitiv provide this company data in many formats.

In all cases, you should confer with your financial advisor about potential investments and their ethical nature.

Ethical investing versus socially responsible investing versus sustainable investing

There are two major secondary terms associated with ethical investing: socially responsible investing and sustainable investing. While they tend to have overlap in their overall goals, they are often expressed in somewhat different terms.

  • Socially responsible investing: This investment strategy chooses investments focused on social betterment. Minority and gender empowerment are two of the most prominent examples.
  • Sustainable investing: This strategy involves future-focused investments that tackle serious global issues. Alternative power sources or initiatives tackling climate change are great examples of this.

As always, talk to your personal financial planner for detailed specifics about individual funds and strategies.

Start your ethical investing with Financial Spectrum

In a world filled with social dilemmas and misleading information, ethical investing may seem like an impossible goal. But by partnering with the right team of experts, your portfolio can be carefully shaped to meet your financial benchmarks — without sacrificing sustainability, responsibility, or your personal beliefs.

At Financial Spectrum, we have decades of experience working one-on-one with conscientious Australians and their ethical investments. Straightforward, knowledgeable, and always commission-free, we make it our aim to provide tailored financial strategies that truly make a difference.

Book a no-obligation financial strategy session today to discuss your ethical investments. Reach our team via the online contact form, or schedule an initial phone meeting to understand if we can help you. We’re looking forward to finding the perfect investments for your moral compass.

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