A beginner’s guide to ethical investing

Investor interest in ethical investing is being fuelled by the increase in extreme weather events, including bushfires, and even the destruction of indigenous heritage sites.

There is an increasing sense of urgency in tackling a number of causes – such as climate change, improving human rights or reducing animal cruelty. The list is almost endless. More investors want their money not just to produce good investment returns, but to be good for society as well.

To invest ethically can mean all sorts of things.Credit:Kathleen Adele

What is “ethical” will differ from investor to investor; what is important to one investor may not be so important to another. There is no answer to “what is an ethical investment”; there are only investments that are ethical to the individual investor.

Ethical investing goes under other names, such as responsible investing, or investing with a focus on environmental, social and governance (ESG) issues. Top social issues for ethically minded investors could include healthcare, public health and community infrastructure.

What does it mean to ethically invest?

To invest ethically can mean all sorts of things. It could mean putting your retirement savings into a superannuation fund that “screens out” certain types of investments where the fund will not hold investments, such as the fossil-fuel industry. An ethical super fund may also choose not to invest in companies involved in weapons and firearms, or those involved in tobacco or gambling.

It is not only super funds that can invest ethically. It can be any type of investment where your money is pooled with other investors and managed by professionals in exchange for a fee.

Collective investments include managed funds and exchange-traded funds (ETFs). There are also “green” bank accounts that lend savers’ money to renewable energy companies, or to property developers building social housing, for example.

As well as a negative screens, some ethical investments also have “positive” screens where they seek to invest in businesses that are doing good.

What are the best ethical investments

There is no “best” ethical investment, only those that invest is a way that aligns with what the investor considers to be ethical. Just because an investment is labelled as ethical does not mean it is a good investment. Just like any other investment, it can produce poor returns.

‘Greenwashing’: What is it?

Some investment managers claim to be ethical to attract investors. However, if pressed, the manager may be unable to prove its ethical credentials.

The Responsible Investment Association of Australasia (RIAA) defines greenwashing as the misrepresentation of a financial product as having greater social or environmental credentials than it actually possesses.

What does the future hold for ethical investments?

While ethical investing was once a niche area, it is now mainstream. Almost every large super fund, for example, will have a specialist ethical investment option, and many funds apply ethical screening across of all their investment options – not just to their specialist ethical options.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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