Ethical investing can help you create a portfolio of investments you believe in.
There can be a life changing magic to investing. It’s not just that it can help you to chase down your goals and put you within reach of a life you really want to live.
It’s also that your investment decisions can help shape the world we live in. You can use your powers for good. At least, that’s the idea behind ethical investing.
What is ethical investing?
Ethical investing is a way you can match your personal morals, beliefs and ethics with your investment choices. You can use your money as a type of vote for what you believe in.
There’s no one way to get ethical investing right, because personal ethics are different for everybody. But there are a few established frameworks that can help guide you through your decision making process. Ethical investors often mix and match the ones that feel right to them.
Different types of ethical investing
The Responsible Investing Association of Australasia (RIAA) has identified the following approaches as being common to responsible and ethical investors.
ESG integration
This is an approach that considers whether a company factors Environmental, Social and Governance (ESG) concerns into its decision making.
We’ve got a whole explainer on understanding ESG criteria, but essentially ESG investors keep an eye out for how a company solves for or responds to ESG issues. These might include environmental concerns such as fracking, water and land sustainability; social issues such as human rights and labour standards; and governance issues such as executive pay and board diversity.
The United Nations (UN) developed the Principles for Responsible Investment (PRI), an internationally recognised charter that investment funds can sign onto. In the year to March 2020, the PRI represented US $103.4 trillion in funds invested responsibly. The UN believes that ESG integration is key to long term value creation.
And active ESG management does tend to make a company perform better in the long run, according to the RIAA, though as with any investment, there are no guarantees.
At Spaceship, our Spaceship Earth Portfolio takes an ESG investing approach.
Screening your investments
Another approach to ethical investing you might take is to screen your investments. Screening essentially helps you to swipe yes or no on companies depending on your predetermined, personal criteria. There are a few different ways you can screen.
With Negative or Exclusionary screening, you’ll avoid companies that don’t meet a minimum requirement you set based on ESG factors.
For example, you may exclude all companies that don’t have a policy to address climate change, or that are missing strong diversity on their corporate boards.
Minimum-Standards (Norms-Based) screening is when you decide on a minimum standard of business or government practice that must be reached by the companies you invest in.
This is when you might decide to only invest with companies that have signed the PRI, for example.
Positive/Best in Class screening means you’ll only consider the companies that are the best of the best when it comes to the criteria most important to you.
For example, you might pick companies that are innovating to solve global problems, or making the very best ESG progress relative to their peers.
There’s no definitive list of the companies that are the best in class, but there are organisations that keep tabs on them.
There are still more ways to find your perfect matches.
Corporate engagement and shareholder action
When you take a corporate engagement or shareholder action approach, it means you’re on a mission to use your status as a company shareholder to make positive change.
It’s a bit like buying a vote in the future of a company and then advocating for it to be a good one.
Responsible investors who take this route tend to be active investors, which means they may engage with the board, team up with other investors, and vote for or against board appointments.
This contrasts to a more passive approach, which may include just selling out of a company if you stop believing in it.
Sustainability themes
Then there’s sustainable investing. It’s a type of thematic-investing and another way you can be an ethical investor.
You could choose an environmental or social sustainability theme, such as cleaner energy, better water management, or sustainable transport, and then pick investments that contribute to it.
Impact investing
Or you could become an impact investor. This means you’ll make a big enough investment to produce a positive and measurable impact on a specific cause.
Impact investors typically direct their investments straight to an organisation through loans and equity, or they may invest through a managed impact investment fund.
Famous impact investors include people such as Bill Gates, whose Bill Gates Foundation has a Strategic Investment Fund that invests in health, agribusiness and gender equity.
What type of ethical investment should you choose?
And can ethical investments make money?
On average, according to the RIAA, responsibly invested share funds outperformed their peers over three, five and ten-year time periods. So an ethical approach to investing may put you even closer to your goals than you otherwise may have been.
At Spaceship we think that the best approach to investing is an informed one, where you arm yourself with as much knowledge as you can, so you can make smarter decisions.
Assessing your investments against your personal beliefs and ethics can help you understand their true value, both financially and to the life you’re creating.
