July 19, 2021 The lowdown on ethical investing and how it works

Ethical investing is booming, with more and more mum-and-dad investors looking to sharpen their superannuation portfolios to align more to what’s important to them.

What started as a bit of a niche investment space decade ago, has definitely hit the mainstream in the world of finance. In fact, a host of prominent superannuation funds now offer a variety of ethical investment-driven products.

So what is ethical investing exactly?

Think of it as a way of filtering and aligning your investments – say, your superannuation – with your own unique values. In other words, you’re filtering out companies that don’t align with what’s important to you and, in turn, focusing on companies that do. 

You still with me? Good!

Digging a little deeper, there are two forms of ethical investing, depending on your values and just how far you want to go in terms of tailoring your investments to them. 

Environmental, Social and Governance (or ‘ESGs’)

These are a form of ‘sustainable investing’ that look to gain positive returns and long-term impact on society, the environment and the performance of a particular business. 

As the acronym suggests, ESGs focus on companies that encompass the following drivers: 

Environmental

A company’s energy use, use of natural resources or treatment of animals, for example. 

Social

The way a company conducts its business, its supply chain and how it treats its suppliers and works with local communities, for instance.

Governance

How a company operates within the law, relates to political situations and, on a rudimentary level, how it manages its accounts, for example. 

Socially Responsible Investments (or SRIs’)

For some ESGs don’t go far enough. This is where SRIs come in. Put simply, they focus on companies that are seeking to drive genuine social change. 

I’ll give you an example. Say you really care for the environment and are about doing your bit. You might look to tailor your superannuation portfolio to have a healthy representation of green-energy-focused companies in wind and solar. Or, for example, say you’re passionate about supporting the advancement of women, you may look to ensure your portfolio is full of socially driven companies with women at the helm.  

Like to make your investments more meaningful?

If you’re considering venturing down the ethical investment path, there are four key considerations you’ll need to make first. 

Be clear on what’s important to you

A great starting point is sitting down, taking stock and working out what’s super important for you. The key here is not to rush. Take your time. The most important thing is that you get to a point where you’re clear so that you can align your super investments and, in turn, your portfolio with your values. 

Choose the strategy that supports your values

Once you’re clear on your values, the next step is working out whether to go down the ESG route or the SRI route. You might find you’re one or the other. You may find you’re both. It all depends on your own unique set of values. Everyone’s different. 

Do your own research

I can’t stress this one enough. Pop ‘ethical investing Australia’ into Google and start researching. Whether you end up staying with your current super fund or not, research the sectors or categories that align with your values and start to get an idea of which companies best align with these. 

Choose the right super fund

You may actually find your current fund and the portfolio has a healthy spread of investments in companies that align with your values. Here, doing a bit of specific research around your fund should be your first port of call – call your super fund if you need to and get them to give you their ethical investing lay of the land. Best case, your existing super fund can be tweaked to align with your values and just how far you want to go in terms of ethically investing your money. Worse case, you may have to shift your super to another fund – and there are plenty of options out there.