Guide to ethical investing

Avoid grey areas when picking your portfolio, writes Anthony Keane

A SURGE in protest action by passionate activists is bringing environmental and social responsibility to the front of Australians’ minds.

Whether it’s schoolkids striking over climate change, coal mining protests or animal welfare activists blocking city streets, it seems Australians are backing their beliefs with greater gusto.

The finance world noticed this trend a while ago, leading to a surge in responsible investment opportunities – especially in super funds.

The Responsible Investment Association Australasia’s 2019 benchmark report, a research partnership with KPMG, says responsible investments have outperformed mainstream funds over almost all time periods in the past decade.

Its assessment of more than 150 investment managers found responsible investment assets under management grew 13 per cent in 2018 to $980 billion and comprise 44 per cent of managed assets.

“There are many different ways to engage in responsible investment,” the report says.

But the jargon can be confusing.

Responsible investment – also known as ethical investment – most commonly considers environmental, social and governance (ESG) factors when researching and making decisions.

Some asset managers use negative screening methods that chop out industries such as weapons and tobacco, while others take a positive screening approach and target areas such as renewable energy, healthcare or sustainable water.

People can invest in responsible managed funds, exchange-traded funds, superannuation funds and bond funds, both in Australia and offshore, or choose assets themselves.

AMP financial adviser Di Charman said most people wanted to do the right thing with their investible money but didn’t know how.

She said they might put some money into an ethical portfolio but leave the rest in mainstream funds that could invest anywhere, but if you wanted to do it right there were no shortcuts.

“This is something that you need to be engaged with,” Ms Charman said.

QUESTION YOURSELF

The first conversation is in your own head.

“Everyone’s values are different so you need to first work out what’s most important to you,” Ms Charman said.

“Do you feel strongly about not investing in fossil fuels?

“Are you interested in discovering cutting-edge solutions for climate change or is improving energy efficiency a greater priority for you? Do some research on what your super fund is doing about that.”

IT STARTS WITH SUPER

The simplest and most common path to responsible investment is through superannuation, where most Australians have money invested.

“Most super funds have an ethical option,” Ms Charman said. “Have a chat with them about what that looks like. “Don’t throw your latest statement in the bottom drawer – look at where your money is invested.

“Australians are the envy of the world with the amount of superannuation savings we have, so we kind of have a responsibility. It’s not the fund’s money; it’s your money.”

Novo Wealth’s Paul Garner, a certified responsible investment adviser, said both ends of the age spectrum were focusing on responsible investment, from

“ageing hippies” to younger investors wanting a different world for their future.

“The most heartening thing is it’s causing young people to get involved in their super,” he said. “Otherwise it seems too far away – this really brings it upfront, and the best thing you have in your favour is time.”

Mr Garner said super funds were “huge fonts of knowledge”.

A MEASURED APPROACH

Responsible investment is putting your money where your mouth is without the angst of ugly clashes.

There are several sides to every argument. Protesters who blocked the entrance to a recent mining conference were questioned by participants just where the metal in their smartphones and tablets came from.

Mr Garner said he thought the surge in protests was “detracting from the mainstream message”. “I understand where they’re coming from – people are frustrated by a lack of action and think they have to move things forward in an aggressive way,” he said.

“The way it’s portrayed is detracting, and we all get tarred with the same brush. “I have always been a fan of a more engaging way of expressing it.”

GET HELP

Navigating responsible investment can feel daunting, so don’t be afraid to ask for assistance.

The Responsible Investment Association Australasia’s website details the investment strategies of ethical funds.

Super funds and investment managers also have information on their websites, and there are specialist financial advisers if needed.

Mr Garner is part of the Ethical Advisers’ Co-op, which spans almost 20 financial services businesses and has members in all states that can help people match financial decisions with their values.

“We spend a lot of time researching the depth of what’s available,” he said.

CHECK FOR TRAPS

Mr Garner said there were light green and dark green responsible investments, and also “a lot of grey areas”.

Know where you’re investing. For example, a fund might screen out fossil fuels but hold pipeline assets that transport those fuels.

Ms Charman said gambling was a touchy subject as to whether it should be held in responsible funds “and even sugar is being discussed now”.

A potential danger is concentrating too much on one ethical area, which could lead to a lack of diversification and poor investment returns.

“Climate-themed funds also haven’t been around for a long time,” Ms Charman said.

“This makes their performance hard to assess. Don’t forget the rule of diversification. It’s not a jump – it’s a step.

“With investing comes a responsibility but it doesn’t have to be overwhelming.”