Choosing a Green Investment
Ethical investing, social investing, responsible investing - these are all terms which represent an increasingly significant part of investing all over the world. More and more, investors are searching to align their values with their investments, pushing companies for greater transparency and momentum around climate change and sustainability.
In Australia, ethical investment has accelerated with Australia’s issuance of green bonds and loans, which currently stands at $15.6 billion. This represents specific funding for green projects such as renewables, clean transport, community initiatives and zero-carbon business models.
As more providers take advantage of these opportunities to meet demand, the ethical investment marketplace is becoming increasingly crowded.
how do fund managers choose what to invest in?
Let’s break it down:
Socially responsible investment (SRI), or ethical investment, takes environmental, social, governance (ESG) or ethical considerations into account for investment selection and management process, which can be important factors for some investors.
At its simplest, ethical investing is wanting to invest in companies that consider both financial return and social/environmental factors to bring about social change. In regards to ethical investing, the two main approaches are positive or negative screening.
Positive Screening:
Choosing to invest in companies demonstrating positive values alongside their financial performance. This can include environmental, social and governance factors (ESG), or sustainable practices or corporate social responsibility. These practices measure a company’s impact on its community such as environmental management, renewables or social funding.
Negative screening:
Choosing not to invest in companies for their negative reputation or controversial products and services, such as human rights violations, tobacco, or reliance on fossil fuels. While it might be easy to identify certain types of companies, such as tobacco or coal producers, it could be much more difficult to ascertain other areas, such as human rights violations like poor labour practices.
How do we define companies with green values?
Currently, companies have different standards in managing their green criteria, and reporting on such criteria is published in different places. Companies could have green certifications or awards, or have sustainability annual reporting.
Ethical superannuation or index funds follow their own positive and negative screening based on their fund values or charters. There are also independent industry reports which compare or list companies based on certain values.
Can ethical investing lead to good financial returns?
The research on the long-term performance of ethical or sustainable investing is mixed, but most studies show that ethical investing does not result in lower returns.
Research has found that performance is very comparable between sustainable and conventional strategies. However, not all sustainable investments have the same return, so that's why we spend time researching the most suitable investment for each client.
Next Steps
There are a number of choices available to investors, from checking if your super fund offers ethical options, to applying ethical principles to your own direct investment portfolio. Shape Financial is here to help you navigate your values and interests for your personal financial situation.