What is Ethical investment
As with the variety of individual ethics, there are varied approaches to how to go about aligning investment and capital with positive outcomes.
We summarise all approaches into the five below sections for simplicity, however, keep in mind there are a number of other versions and funds including blending of the below strategies.
It is important to note there is no one way to approach Ethical investment, and often a multi-tiered approach is best. This is also a constantly developing area, progress over perfection.
ESG
ESG Stands for Environmental, Social and Governance, and has almost become the colloquial term for Ethical investment within the industry. It is simply a process of identifying and filtering companies that have processes and procedures for quality consideration in these 3 areas, in doing so reducing investment risk and the likelihood of controversy.
This approach can be quite varied and most Australian Fund managers actually have some form of ESG stage in their investment process, whether they use to it its fullest capacity is another thing. Australia lags the world in this area, wherein some more progressive markets ESG is the norm.
Look for: Investment Managers that have not only a strong ESG process but use that stage to select their investments.
Watch out for Investment Managers that market ESG, but lack substance and a hard line on companies that don't agree with your values.
Shareholder Advocacy
We also see this used a lot as a responsible and ethical investment strategy. Advocacy states that without a voice at the company to vote against bad behaviour and for good behaviour, you cant change a Company's ways. This is not untrue and we have seen a number of examples where shareholders have voted to change a companies practices in positive ways.
Look for: Investment Managers that have high voting records on climate matters. Company directors are beholden to shareholders, so voting can make genuine change.
Watch out for Buzz words and empty marketing - where a fund says they hold a particular company to promote change, but never actually vote for resolutions that could do so.
Negative Exclusions
This approach is also quite common, where an investment manager will exclude companies that profit from undesirable areas such as thermal coal, tobacco or armaments. This is an easy approach for investors to use as an alignment as it can be quite simple and clean-cut.
The idea is through divestment you can send a message to major companies with poor behaviour to change.
Look for: Clear and concise definitions of what is and is not included or partially excluded.
Watch out for: Not all exclusions are equal, with thresholds within their exclusion ranges (which can result in still holding misaligned companies) or being misleading - for example stating they don't hold Australian Listed Tobacco producers, which is true, because they don't exist.
Best Of Breed
A more in-depth version of ESG best of breed uses more positive approaches to identify leaders in the industry in the way of social engagement internal governance and environmental practices. Through this, they aim to encourage better behaviour through investment, the carrot, where negative exclusion investment is the stick.
Look for: Clear and concise definitions of what is and is not included or partially excluded.
Watch out for: Holdings withing the fund that you may not want to be involved with.
Impact Investment
Impact investment is a step up again on the best of breed approach from a positive standpoint. This approach involves investing directly with companies through shares and green bonds, that are directly involved with sustainability and human rights.
These areas tend to fall around healthcare, technology, food and water security, waste management and power generation.
Look for: Impact funds that provide not only investment return information but quantifiable social returns.
Watch out for: Greenwashing can be very common especially in Green/Impact Bond funds.
Chanie, Preston - One of our Ethical investors
Nathan is super skilled at making you feel comfortable enough to make financial decisions (big or small) under his guidance. He offers solid financial planning advice without all the jargon you’d expect from his industry.