Everyone wants positive returns from their investments, but what if you could do good in the world while you were making money?
This is the goal of ethical investing, also known as sustainable or socially responsible investing. Proponents argue that not only is it possible to do good, but in the long term it’s actually more financially rewarding. The theory is that companies that do less harm, look after their staff and are well managed provide better returns.
There are numerous examples of thriving companies with a strong social conscience, such as United States ice-cream maker Ben & Jerry’s, whose activism resulted in the development of chlorine-free food packaging and sustainable agriculture in the 1990s.
Online retailer Zappos started from nothing in 1999 and was sold 10 years later for $1.2 billion, while consistently being listed as one of the world’s most ethical companies.
The challenge of ethical investment is that ethics are very personal and mean different things to different people. It can also be very labour intensive not only to perform investment due diligence, but also to assess a company’s sustainability credentials and, as such, ethical investment funds can be expensive.
These challenges aside, there are several great ways to concurrently meet investment and social objectives:
- Start with superannuation Most funds have a socially responsible investment investment option and the long-term nature of super is a great fit for the extend timelines needed for companies which, by definition, don’t take shortcuts. There are even super funds that are entirely devoted not only to making investments in ethical companies but to use their influence to agitate for positive change in corporate behaviour and government policy.
- Specialised managed funds There are a number of actively managed ethical funds, ranging from light green – a negative screening that avoids companies with adverse social or environmental impacts – to dark green, which select organisations that achieve positive social or environmental outcomes.
- Modified index portfolios These offer relatively low-cost access to a broad index with an ethical overlay, most often excluding tobacco and controversial weapons. Depending on your ethical stance, these exchange traded funds facilitate an ethical approach without some of the high investment management fees, which sometimes characterise the SRI sector.
- Build your own With the ability to inexpensively trade Australian and international shares with almost unlimited capacity for DIY research via the internet, it’s possible to build a portfolio that meets your moral code. However, all the commonsense investing rules still apply, so make sure you have adequate diversification, don’t try to time the market, and don’t let your emotions get in the way of making good investment decisions.
Catherine Robson is a financial planner and CEO of Affinity Private.
This article was originally published in the Sydney Morning Herald.