Ethical investing

Ethical investing is a way to hold companies accountable for the environmental, social and ethical consequences of their actions. Ethical investing is also about making investing choices that align with personal values and seeking to use investment dollars to influence the way businesses behave. At its core, ethical investment is about investing with a conscience and choosing companies with a moral compass.

There are a few different types of ethical investing, encompassing subcategories like sustainable investing, impact investing, responsible investing, and ESG investing – which can have some overlap in definitions.

Some investing approaches prioritise financial outcomes, but take social, environmental and ethical values into account, while other approaches prioritise values, and consider financial outcomes only after these values have been satisfied.

Interpretations of ‘ethical’ can vary widely and investors need to be mindful of how ‘ethical’ is defined, which is generally best illustrated by the screening processes that the fund manager employs.

An ethical ETF may exclude particular industries or companies from their investment holdings. Alternatively, it may target companies or industries for inclusion if they meet specific sustainability criteria.

What makes an investment ethical? ESG (environmental, social, and governance) refers to three areas that can define how sustainable, responsible, or ethical a business is.

Though ESG is generally concerned with non-financial indicators, these issues are nevertheless relevant to board accountability and risk management practices and may impact future earnings and financial performance.

Businesses that apply ESG standards might be more diligent, and more likely to succeed over the longer term. ESG factors are relevant for understanding corporate purpose and strategy, as well as management quality. They can help investors understand a company’s risk profile and evaluate how prepared the business may be for the future.

Here is an overview of what ESG stands for:

• Environmental – Environment factors can focus on pollution generated, waste management practices, resource utilisation, carbon emissions, supply chain management, and impact on climate change
• Social – Social factors might be concerned with how companies respect employees and people in the wider community. Relevant factors include workplace diversity, labour practices, working conditions, and work health and safety
• Governance – Governance factors include corporate policies and company governance practices. Tax strategy, data security, product safety, executive compensation, donations, lobbying, bribery, misconduct, business ethics, culture, innovation, and board diversity could be relevant

Socially responsible investing (SRI) takes non-financial criteria – such as social, ethical, and environmental outcomes¹ – into account when investing. The goal is to end up with a financial and moral return by directing investment dollars towards the environmental and social issues that the investor views as important.

SRI is also known as sustainable investing, ethical investing, community investing, and green investing. SRI also encompasses impact investing, whereby making a positive social impact is the focus.

Ethical investing and the use of ethical ETFs benefits investors, as it can enable people to facilitate change in the world and express their personal morals and values through their investment decisions.

Having gained significant traction in recent years, ethical investing also has the potential to effect social or environmental change in the long-term by essentially rewarding the companies that operate responsibly and helping them to grow.

A common myth associated with ethical investing is that people invest responsibly at the expense of financial performance. However, studies have revealed that companies with ethical credentials may perform better in the long term on the basis that governance, social or environmental issues can have an impact on growth².

A further benefit to investing in companies with a strong ESG focus, is that these businesses may be less vulnerable to problems such as consumer boycotts, PR disasters or controversies (such as the Deepwater Horizon incident in April 2010), which may greatly cost shareholders.

For investors looking to invest in ethical shares, ethical ETFs may be a suitable option.

An Australian ethical ETF or an international ethical ETF enables instant diversification for portfolios, offering exposure to several companies that have been screened for ESG in one trade, eliminating the need for an investor to hand-pick and invest in multiple ethical stocks separately.

The definition of ‘ethical’ or ‘ethical share investments’ can vary across providers, and therefore investors can find it challenging to work out whether a fund is investing in companies that are genuinely ethical (and consistent with their own ethical views). So, how can investors interested in buying ‘ethical companies’ ensure they are investing in ethical funds or ethical shares that actually align with their values?

Betashares offers Australian ethical investment options that trade on the ASX and use some of the most comprehensive ethical and ESG screening methodologies in the industry. As an example, the Betashares Australian Sustainability Leaders ETF (ASX: FAIR) is an Australian ethical ETF that provides exposure to a diversified portfolio of Australian companies that meet strict sustainability and ethical standards.

Betashares’ ethical ETFs combine a fossil fuel-related screen with a broad set of ESG criteria, offering investors a true-to-label, sustainable and ethical investment option. Our ethical ETF range applies some of the industry’s most stringent ESG screens.

In addition to fossil fuel-related screens, the screening process includes screens to remove companies or bond issuers with significant engagement in harmful activities and industries, whether that concerns people or the planet. Examples include armaments, gambling, animal cruelty, alcohol, and junk food.

Businesses or bond issuers with positive sustainability and ethical business operations (e.g. positive environmental projects, renewable energy sites, and healthcare companies) are prioritised in the portfolio.