They Say That Money Talks – So What Is Yours Saying?

Most of us know that our superfunds invest into many industries and shares – but your superfund investments are likely funding activities that are not sustainable and may be contrary to your ethics.

If investing is something that you are interested in, but you don’t want your money to support industries or practices you don’t agree with, then ethical investing may be what you’re looking for.

What Is Ethical Investing?

Ethical investing refers to using one’s own ethical principles as their primary filter for where they invest their money. This obviously comes down to the individual’s perspective, however, it can generally be summed up as thinking with your moral compass, rather than what gives you the best returns.

Common denominators are shared in ethical investing. For example, some funds align with an investor’s personal beliefs towards the environment, such as those ensuring tree replanting, or clean energy. Others, meanwhile, may align them with religious, or political precepts. For example, some investors may choose to eliminate specific industries, such as sin stocks, which are companies that are involved with traditionally unethical practices, such as gambling, alcohol, or firearms.

So, how can you make money while making the world a better place?

History of Ethical Investing

Ethical investing has its roots originally in religion. In Biblical times, ethical investing was mandated by Judaism. Tzedek (trans: justice and equality) called for justice to correct the harm that humans cause. To have money, or own property, carried responsibility to prevent immediate or potential harm.

Later, in their 1758 Yearly Meeting, The Quakers decreed those members participating in the slave trade – the buying or selling of humans – would be ex-communicated. They further prohibited members of the clergy from spending money on the slave trade or leasing their ships for use in the transatlantic slave trade.

In 1760, John Wesley, one of the original founders of Methodism, preached the importance of refraining from investing in industries that harm human beings, such as chemical plants and mining. He outlined in one of his sermons one the basic tenets of ethical investing that we “ought not to gain money at the expense of life or by losing our souls.”

By the 20th century, the developments in ethical investing mirrored the political climate and social trends of the time. For example, ethical investors in the late 1960’s and early 1970’s began focusing on organizations that supported unionist movements, and further shunned companies that supported or profited from the Vietnam War. The 1960’s also saw a rise in Islamic banking, which shuns investments in alcohol, gambling, and pork, alongside prohibiting interest.

The 1990’s saw ethical investments narrowing down on environmental issues. Ethical investors moved away from organisations that profit off coal, fossil fuels and deforestation and placed their money into companies that supported clean and sustainable energy. Today, ethical investing continues to primarily focus on impacts on the environment and society, sometimes referred to as green investing.

Benefits of Ethical Investing

Thanks to impact portfolios offered by a plethora of sustainably mutual funds, ethical investing is easier than ever. Not only that, but a study by AMP found that the median ethical investment manager has outperformed the S&P/ASX 200 Index over the span of five years.

There is evidence to suggest that ethical investments may offer lower levels of market risk than traditional investments, even in volatile markets such as the COVID-19 pandemic, or the outbreak of the Ukraine/Russian war. According to Morningstar data, 24 out of 26 ESG index funds outperformed comparable conventional funds during the first quarter of 2020.

If you need more reasons to switch your investments to an ethical fund, then consider this – You can live in alignment with your values. By investing in an ethical way that is aligned with your values and beliefs, you’ll be making money and using your money to improve society. You can sleep better at night knowing this.

How to Build an Ethical Investment Portfolio

Building an ethical portfolio is very simple. Here’s how to start investing ethically:

  1. Decide how involved you want to be

When it comes to building an ethical portfolio, you can either choose to handpick specific investments and monitoring them over time, or you can get some help.

If you want to build your own portfolio, you can open a brokerage account, and use screening tools to find the right funds for your portfolio. If you don’t already have a brokerage account, here’s how to open one.

If you want assistance building a portfolio, that’s fine too! Many individuals go through a robo-advisors. Robo-advisors use algorithms to build and manage investment portfolios based on your goals, and your ethical preferences. They are also much cheaper to use compared to traditional advisors. Click here to view some robo-advisors that offer socially responsible portfolios.

  1. Figure out what’s ethical to you

Before you start splurging, take some time to outline what ethical investing means to you. Does a construction company still count as ethical to you if it includes reforestation initiatives for every tree it cuts down? Knowing what industries, you want to support and which you want to avoid will make it easier to include or exclude investments.

  1. Build your portfolio

Once your brokerage account is set up and you have figured out your goals, you can start building a portfolio. There are two simple ways to add ethical investments to your portfolio:

  • Buy ethical stocks that you align with your values. If you’re new to this, you can check out Nerdwallet’s simple how to guide for buying stocks.
  • Buy through Exchange Traded Funds (ETFs) – Click here to read more about how to do this here.

As Always, Check The Product Disclosure Statement (PDS) Before You Invest

The PDS that comes with all investing portfolios isn’t just there for show. It contains a lot of valuable information that you’ll need to know about your investments, and about your own portfolio, including:

  • what index, sector or asset the ETF or stocks returns aims to replicate
  • the fees and costs of investing
  • the risks over the short, median and long term
  • how to make a dispute or exit from your plan.

Thinking of investing ethically with your SMSF, or as a side hustle? It’s always wise to seek financial advice first. Auditax Accountants can help you make the best choice for your SMSF or goals. Call us on (08) 9358 5599 and ask to speak with one of our specialists.